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What were retail investors doing during Tuesday’s stock market selloff? Here’s a clue: They’re ‘generally a contrarian bunch’

By September 15, 2022Uncategorized

When others were looking for the exits during Tuesday’s selloff, many retail investors saw an entrance to more future gains — but what were they stepping into?

Everyday investors bought up $2 billion in equities and ETFs on Tuesday as stock markets slipped badly on hotter-than-hoped August inflation numbers, according to Vanda Research.

It was 2022’s second largest day of retail purchases into stocks, researchers said in a Wednesday note. A lot of the dip buying occurred in the afternoon and closing 10 minutes, they added. 

When the dust settled Tuesday, the Dow Jones Industrial Average DJIA had dropped nearly 1,300 points, or 3.9%. Meanwhile, the S&P 500 SPX shed 4.3% in value and the Nasdaq Composite COMP dropped by 5.2% as investors mulled the possibility of stubbornly high inflation and aggressive interest rate hikes to counter the rising price problem. It amounted to the worst daily loss since June 2020. 

Tuesday’s buying spree was second to the $2.6 billion spent on May 5, when the Dow Jones Industrial Average sloughed off more than 1,000 points, Vanda Research said. On that day, many investors turned panicky after a rally the day before during a freshly-announced Federal Reserve interest rate hike.

Seeing a pattern? So are the analysts at Vanda Research.

“At the cost of sounding like a broken record, we like to remind our readers that retail investors are generally a contrarian bunch — they buy the dip on down days and scale back their purchases (or outright sell) on up days,” they wrote in Wednesday’s note.

A lot of Tuesday’s buying focused on exchange traded funds such as Invesco’s QQQ QQQ, tracking the tech-heavy Nasdaq, and the SPDR S&P 500 ETF Trust SPY, which follows the S&P 500 benchmark, researchers said. The stock-picking purchases centered on big names including Apple AAPL and Tesla TSLA. 

Companies like Apple and Tesla already loom large in retail investor portfolios. On Friday, a new index from Robinhood HOOD, the brokerage app popular with many new investors, said those companies are among the 10 most-held stocks within its users’ accounts.

(People who like going against the grain might also want to look at companies in sectors like online advertising, according to MarketWatch’s Philip van Doorn.)

Despite Tuesday’s spending spike, retail investor buying demand has been weakening, Vanda Research noted. That’s partly a seasonal trend when holiday spending starts to compete for investors’ dollars, analysts said. But it’s also a sign of the rough 2022 results so far, they noted.

As of Wednesday, the Dow was down more than 14% year to date, while the S&P 500 and the Nasdaq were down more than 17% and 25% respectively. As of early Wednesday afternoon, the three benchmarks were making modest rebounds.

But will Tuesday’s bet pay off for average investors? Or is the purchased dip going to turn sour?

Time will tell, as worries loom about a recession.

But speaking of time, it’s not market timing, but the amount of time spent in the market that’s the key ingredient for long-term return on investment, financial advisers stress.