Retail Investors Have Been Beating Hedge Funds: Is That Dangerous?

Shah Gilani|May 29, 2020

Just about everything in our lives is different, no thanks to the novel coronavirus.

One glaring difference is how retail investors have plunged into the stock market since COVID-19 slammed markets and shutdown the country.

While that’s different enough, what’s vastly different is retail investors, instead of typically selling at the bottom of a plunge, started buying early, have been buyers all the way up, and according to Goldman Sachs research, with their whacky list of favorite stocks have beaten hedge funds and their top holdings.

Since a ZeroHedge article earlier this week pointed out, “After years of trying and failing to sucker in retail investors into the stock market to allow a long-overdue distribution from top shareholders to mom and pop bagholders, as has been the trend heading into every prior recession…” maybe it’s time to ask, with stocks racing higher heading into another recession, is the new retail trend dangerous?

The answer is “no,” it’s not dangerous, at least not yet. But, “yet” could be any day now.

Here’s what you need to know is going on and what it means to your Total Wealth.

Retail investors have been returning to the stock market for years now, mostly following “passive investment” advice and buying index-following ETFs, that track market benchmarks.

And they’ve been doing very well, thanks to the market’s long bull run.

Why Investors Are Flooding the Markets

What’s unusual on the heels of the market’s frightening selloff in late February and March this year, retail investors not only mostly stood their ground and didn’t sell, they “bought the dip,” as they’ve been taught to do since 2009, and became active as markets bottomed then rocketed higher.

There’s been a lot of speculation as to what’s been driving retail investors into the market, not so much as passive investors lately, but as active stock-pickers.

It could be there hasn’t been any sports betting, on account of there not being any sports being played.

It could be because people are bored at home and trying to make up for lost income.

It could be that they’re looking for a new career.

Or, it could be as simple as there were suddenly a lot of cheap stocks available and investors got fired up.

Whatever the reasoning, if you were one of the many savvy investors who flooded the market, you may have noticed it’s becoming harder to grab a profit. Maybe it’s the computer-driven trading, the influx of newbies, or simply the volatility that leaves the markets kicking and screaming, day in and day out.

Investing the “old way” with simple analysis and strong stocks can work, but it’s not guaranteed the way it used to be. Today, you need more advanced software.

Maybe it’s a supercomputer or the latest AI software or a quant-trading algorithm. Maybe it’s all-three, combined.

That’s what Tom Gentile’s using, and he’s been having some stellar results. His Alpha-9 Trader harnesses all of the latest technology to read the markets and pick out trading patterns that are otherwise invisible to the naked eye.

Tom then uses this, applies it to his research and the current market conditions, and gives recommendations that have handed his readers a shot at upwards of $2,000, day after day.

All you need is Tom’s help and your favorite trading platform, whether that’s eTrade, TDAmeritrade, or Robinhood, and you can start trading. Tom created an entire presentation, explaining how it works, and how it can make you money, and you can watch it right here.

The Breakdown: Who’s Trading Alongside of You

It didn’t hurt that recent trends, mostly thanks to Robinhood, a millennial favorite stock trading platform, including commission-free trading and the ability to buy fractional shares (after all, how many shares of Amazon can the average retail trader afford?) encouraged retail trading at all the discount brokerages.

So-called stimulus checks didn’t hurt either.

The ZeroHedge article showed where some of the money people received went, based on “transfers” out of their bank accounts.

Households with less than $35k annual income didn’t move any discernible amount of money into any trading accounts.

But for households with $35k to $50k, transferring money into a “securities” account was third on their list, after first putting money in savings and second, withdrawing it from ATMs.

For the $50k to $75k households, transferring into securities accounts was also third on their list of moves.

Households in the $75k to $100k bracket didn’t move any discernible amount into any trading outlets.

Households in the $100k to $150k first moved money into savings accounts and next into securities accounts.

The highest income segment, households in the $150k+ category first put money into paying off loans, then insurance, then savings, then travel, then home improvement, then entertainment and recreation, and lastly into securities.

Who’s Trading What and How That Affects You

The list of stocks favored by the new retail crowd includes the likes of Apple Inc. (AAPL), Amazon.com Inc. (AMZN) (thanks to fractional shares), Facebook Inc. (FB), Tesla Inc. (TSLA) and Moderna Inc. (MRNA). But they’re also betting heavily on really beaten down stocks like Marathon Oil Corp. (MRO), Ford Motor Co. (F), Carnival Corp. (CCL), Norwegian Cruise Line Holdings (NCLH), American Airlines Group Inc. (AAL) and Delta Airlines Inc. (DAL), GoPro Inc. (GPRO), Walt Disney Co. (DIS), and other hard-hit stocks.

Big questions include:

Are retail investors wrong to be bidding-up beaten-down stocks and wrong to be chasing markets higher?

Are they being fed shares by pros who are getting out and getting their clients out of stocks as retail investors elevate prices enough to lighten their losses?

Are retail investors smarter than hedge fund managers?

And, heading into a Greater Great Recession, will they be bagholders once again?

To be on the safe side, everyone watching the market should be keeping an eye on all the “cheap speculative” plays like the airlines, like the cruise lines, like energy stocks, cheap stocks like Ford and GE, the stocks the retail crowd are betting on, to see if they falter and start falling.

If retail investors start fleeing because they’re afraid, because they’ve bitten off more than they can chew, because they can’t afford to not keep any gains they’ve made, can’t afford to be left holding anyone’s bag of unwanted stocks, it’s time to take cover.

If retail buying can levitate the market, retail selling can cause it to tumble.

If retail selling takes markets back below important support levels, especially support levels like 23,000 for the Dow Jones Industrials, 2700 for the S&P 500, and maybe most importantly, 8500 for the Nasdaq Composite, more retail selling, in its most dangerous form, passive investors selling, could take markets back down towards their lows.

So, no, there’s no reason to worry about active retail buying in this rally. Until there is a reason.

You’ve been warned.

Until then,

Shah