Wednesday's Market Minute: Retail Traders Take A Victory Lap

The verdict is in, and the ruling is unanimous: retail traders who bought the stock market bottom won this round, and they won big. Thanks to fund flows and trading data, the scorecard is pretty easy to track. Mom & Pop traders piled in, and Wall Street panicked. How did average Joe and Jane get so far ahead of the purported “smart money?” The simple answer: they didn’t overcomplicate things.

Analysts pored over charts, viral data, and historical models, but failed to realize those models don’t work when there is an unprecedented amount of government assistance at work. Frankly, there was also a lot of guesswork, as economists became virologists and investors became psychologists. Groupthink among the investing elite steamrolled fast, and no one wanted to be the last bull standing. Much like how experienced poker players can have short-term losses against amateurs, professional investors just got overconfident. And it wasn't just luck by retail traders, it was good, simple logic. Wall Street was fretting over a recession on paper, and everyday folks were looking at the paper in their wallet.

They assumed life would eventually return to something close to normal and bought the stocks trading abnormally. When stories of the pickup in retail trading started circulating in May, professionals were sure it was a sign the good times were going to end, because they hadn’t yet accepted that retail’s logic during the rally was actually the winning one this time. Instead of reassessing the situation, they based their decision on their perception of retail’s ability. So, small traders: take a victory lap, but remember that market dynamics are always changing. In March, the simple analysis of buying what you know worked.

Right now, it's more like flying blind. The economy is still fragile, the S&P 500 is almost 45% off the low, and no one knows what corporate earnings will be. As we heard from Mainstay Capital's David Kudla yesterday, there is plenty of reason to think there are more gains to come in airline and travel stocks if the economy continues to reopen. But the more those cyclical stocks power the market, the greater risk for downside swings on disappointing news. As we saw yesterday, down days in high-beta stocks can be brutal. If you can't handle that, there's nothing wrong with taking profits and reassessing.