The maxim “buy the dip” has been commonplace in retail investing – and retail investors demonstrated their commitment to this idea during the pandemic. But for the first time in a while, retail investors might be ignoring that guidance now.
The S&P 500 index dropped over 30% in March 2020. Ordinary investors didn’t flinch; instead, they bought up index funds on the cheap. In many cases, this activity has worked as a counterweight to the market’s plunges.
A note from Vanda Research, a finance analytics firm, describes how that’s been true for 2021 as well, except for the most recent hiccup in the markets.
“Retail investors have bought every minor dip in equities this year, shielding the S&P against a double digit sell-off,” analysts Ben Onatibia and Giacomo Pierantoni wrote. Usually the activity has been in S&P 500 index funds and ETFs like QQQ, they added.
On Yahoo Finance Live this week, BMO senior investment strategist Jon Adams pointed out that the buy-the-dip strategy has been “a very good strategy over the last few years.”
But while there was a small uptick in inflows in the types of ETFs usually seen in dip-buying this week, “the magnitude has been a little underwhelming relative to previous sell-offs,” Vanda analysts wrote.
In similar-sized drops in the market in July and August, retail investors bought anywhere between 35% and 100% more than they did between Sept. 10 to Sept. 14.
September's 2.1% drawdown, for example, saw $657 million of retail buying in US equity ETFs, and July's 2.9% drop saw $1.39 billion. Only one other drop — also 2.1% in March — had less retail buying, at $596 million.
The weird relationship between crypto and meme
In general, Vanda’s analysts write, retail buying has dropped off recently, even as autumn begins to emerge and people start to spend more time indoors — a big thesis over the past two years that held trading increased when it got colder out.
But the issue in play for U.S. stocks, and tech stocks in particular, which Vanda says are (comparatively) cooling off for retail investors, is crypto.
“A sudden revival in cryptocurrencies is partly to blame,” the analysts wrote. “After the sudden washout in leveraged crypto positions last week, we have noticed a modest pick-up in the open interest of BTC perpetual swaps.” (A perpetual swap is a way to own bitcoin without actually having to deal with the ownership of the digital asset.) In other words, as crypto interest went up, stocks interest dropped.
Onatibia and Pierantoni hold that this inverse relationship between hot retail stocks and crypto make them bullish on the “emerging meme stocks” that get abandoned during crypto rallies.