Retail investors' favorite stocks beat the market by 7 times. Why is this a worrying sign?

Private traders in the U.S. have been buying stocks at a record pace since early September, with their favorite stocks - from Tesla and Nvidia to Dell - up an average of 30%, while the S&P 500 index has added only 4%. Trading volumes hit an all-time high, reflecting a surge in FOMO - fear of missing out on profits - and MOMO - chasing trends. Analysts warned that such a surge of private traders could lead to overheating of stocks, and any cooling of their interest could cause a correction in the market.

Private investors in the U.S. are buying up shares at a record pace, Bloomberg reports. Thus, the basket of 46 shares, the most popular among retail players, has grown by 30% since the beginning of September, while the S&P 500 index has added only 4.3%, the agency notes with reference to Citigroup data. And since the beginning of October, the volume of private trading has reached an all-time high. From October 2 to October 8, private traders increased the volume of stock purchases to $7 billion per week - against the average level of $5.3 billion for the last two months, Bloomberg adds, citing JPMorgan data. Against this backdrop, the seasonal slowdown usually seen in October has passed the market this time, with retail investor activity at its highest since 2018, when Citi began tracking this data.

The increase in activity coincided with a new surge of interest in stocks related to artificial intelligence, amid corporate deals, expectations of lower rates and stable financial results of companies, emphasizes Bloomberg. Among the favorites of traders was Dell Technologies, which showed the largest inflow of investment over the past five months, as well as some representatives of the "Magnificent Seven" - Tesla, Nvidia and Meta. Apple was not included in the list.

In addition to equities, investors' risk-taking sentiment is also evident in the options market: according to JPMorgan, over the past seven trading sessions, the volume of options sales by private traders reached a record $93 billion, mainly due to increased activity in the technology and telecom sectors. In addition, investors were active in ETFs, with inflows totaling $5.8 billion, the highest in nearly five months, including gold (SPDR Gold Shares) and silver (iShares Silver Trust).

The rise in retail investors' appetite for risk may be excessive, analysts at 22V Research warned. Such a sharp surge in trading raises concerns that retail players' favorite positions are becoming too overheated, Bloomberg notes. If investor interest cools a bit under such conditions, it increases the risks of a sharp correction, warned analysts at 22V Research.

"We have long argued that stock market growth is largely fueled by a combination of FOMO [fear of missing out] and MOMO [short for 'momentum,' referring to trend-following investors - OnInvest]," said Steve Sosnick, chief strategist at Interactive Brokers. - Now any drawdown is seen as a buying opportunity, and uptrends are seen as a signal to join".

"Given their concentration, even a small correction in these securities could have a disproportionate impact on the entire index of retail favorites," said Dennis DeBoucher, chief market strategist at 22V Research. He added that even small changes in interest rates, credit spreads or volatility could trigger a sharp drop in Citi's retail-favorite basket.

This article was AI-translated and verified by a human editor