US Stock Danger Signal: Retail Investors "No Longer Buying the Dip, Selling on Rallies"!

The behavioral patterns of US retail investors are undergoing the most alarming shift since 2020—they are no longer entering the market to buy the dip during downturns, but are instead capitalizing on rallies to continuously reduce their holdings.

According to the latest report from JP Morgan, total retail purchases of US stocks in March decreased by nearly 50% from the historical peak in January. Last Wednesday, when the market experienced a phased rebound, although overall retail inflow data was acceptable, the structure clearly favored fixed-income ETFs over equity assets—implying that retail investors' risk appetite is continuously contracting rather than recovering with the market warmth.

The potential impact of this behavioral shift on the market should not be underestimated. Retail investors have historically been an important marginal buying force during US stock market downturns, and their inertia of "buying the dip" naturally stabilizes the market. Now, this support is wavering, and at the same time, institutions have not shown significant entry, widening the market's vulnerability due to the funding vacuum between buyers and sellers.

A Historic Reversal: "Momentum Crowding" Surpasses "Buy-the-Dip Crowding"

Arun Jain, an analyst at JP Morgan, stated that retail investors have been continuously chasing momentum strategies since the end of 2023, and entering 2024, they have gradually been realizing profits in long-term winners while seeking opportunities in laggard stocks. Historical patterns show that retail investors typically tend to buy on dips, concentrating their additional purchases in underperforming stocks within a three-month period—since 2020, this "left-tail buying" strategy has yielded positive average returns.

However, this behavior has recently seen a historic reversal: the crowding into short-term momentum stocks by retail investors has, for the first time, surpassed the crowding into laggard stocks. This means that retail investors are still holding high-beta assets (crowding at the 92.5th percentile, highly consistent with short-term momentum) and are no longer adding to low-volatility stocks (i.e., the current laggard stocks). Concurrently, retail investors are also continuously reducing their exposure to cyclical assets.

This fundamental shift in behavioral logic marks a transition for retail investors from their previous role as market "stabilizers" to a more defensive, even short-term risk-averse stance—this is a structural warning that warrants continuous attention for the US stock market, which relies on retail funds for bottom support.

Purchase Volume Plummets, March Data Shrinks by Nearly Half from January Peak

On a data level, the retreat in overall retail purchasing power in March exceeded expectations.

According to the JP Morgan report, as of last Tuesday, although retail investors still maintained moderate net inflows into ETFs, they continuously showed net selling in individual stocks, even as the market had rebounded during this period.

Last Wednesday, the market strengthened, and the overall retail inflow was at the 76.6th percentile for the day, appearing healthy on the surface, but it was mainly driven by ETFs (96.4th percentile).

More crucially, the incremental ETF buying was concentrated in fixed-income ETFs (98th percentile), led by short-duration products like SGOV, rather than risk assets such as stocks. In terms of individual stocks, retail investors recorded some inflow at midday (64.7th percentile) but continuously reduced their positions in the afternoon, ending the day almost flat (38.1st percentile)—a typical "sell on rally" pattern.

Energy Sector Sees Largest Weekly Net Outflow on Record

At the individual stock level, excluding the "Mag 7" (the seven largest tech giants), retail investors net sold almost all sectors in the week ending April 1st, with only Consumer Staples being an exception.

The selling pressure in the energy sector was particularly intense.

Retail investors had been continuously net selling energy stocks since February, but the selling intensity sharply increased last week, peaking on Wednesday, marking the largest weekly net outflow on record, far exceeding historical extremes. ExxonMobil (XOM), Chevron (CVX), and Occidental (OXY) were the main drags, with z-scores of -6.9, -6.6, and -5.6 respectively on Wednesday.

The storage chip sector also faced pressure. Following Google's release of a new compression technology that can reduce the memory requirements of AI models, Micron (MU) and SanDisk (SNDK) were the most sold storage stocks that week, with z-scores of -2.3 and -3.0, respectively.

The technology sector as a whole was not spared. Although retail investors continued to buy retail favorites like TSLA, MSFT, and NVDA, they net sold other tech stocks beyond the "Mag 7," leading to the technology sector's overall position falling to its lowest level in nearly six months.