Retail investors as a group make systematic decisions. Tracking volume on Robinhood could indicate when the stock market crash is nearly over.
Just two weeks into this year’s swiftest, most brutal stock market crash in history, some silly market watchers were already trying to spot the bottom. The Dow Jones, S&P 500, and Nasdaq would fall even further the following two weeks.
So it would seem bottom spotting was a bit premature at the time.
It still might be, but even if it is, the conversation about how to scan for and spot the market bottom when it happens will prepare investors for when the time is right.
One methodology is tracking retail investor activity. Research shows the behavior of individual investors is a potentially useful contrarian indicator.
These headline readers are often the last to pile into frothy valuations preceding a stock market crash. But they’re often the first to sell as the market hits bottom and rallies.
Individual or retail investors are— as one might expect— not the most savvy traders. Investopedia describes this cohort of investors as:
Individual investors are thought to be less knowledgeable, less disciplined, less skillful, and more prone to behavioral and emotional errors than professionals.
A 2011 study, “The Behavior of Individual Investors,” by researchers at the University of California Graduate School of Management concluded that “as a group, individual investors make systematic, not random, buying and selling decisions.” And they tend do so to the detriment of their portfolio.
This research documents that individual investors (1) underperform standard benchmarks (e.g., a low cost index fund), (2) sell winning investments while holding losing investments (the “disposition effect”), (3) are heavily influenced by limited attention and past return performance in their purchase decisions…
It’s unsurprising then that Business Insider ran a story on Feb. 21 about an explosion in “mom and pop trading.” In fact retail investor trading reached record volumes.
That story ran two days after the S&P 500 Index peaked at an all-time closing high of 3,386.15. Investors piled into the most expensive stock market in history, even as coronavirus clobbered China.
But interestingly, retail investors are leaning into this stock market crash. They’re buying up the dip without waiting for the bottom. If they lose patience or get scared, past behavior suggests they’ll sell off near the market bottom.
The Robinhood app pioneered commission-free trading from your smartphone. It’s wildly popular with millennials, and its user base is terrible at picking stocks. These characteristics make it a suitable bellwether for retail investors.
Here are four of the most popular stocks on Robinhood to watch. Robinhood publishes the number of users holding these shares on its 100 most popular stocks list. The Next Web captured a snapshot of these figures for the top 10 in November.
Aurora Cannabis (NYSE:ACB) – Robinhood users love this massive stock market loser. While pot stocks are popular with millennials, they lost a staggering $13 billion last year. In November 542.6K users held ACB. But today that number is 860K. If it drops back toward 500K territory, retail investors might be making an exit.
Ford (NYSE:F) – Retail investors tend to buy cheaper stocks in companies they hear about in the news. Ford is at this intersection. While 301K users held Ford in November, 658K hold it today. If that figure dives, the stock market bottom could be around the corner.
General Electric (NYSE:GE) – GE has enormous upside potential. Some retail investors may not be patient enough to stick with it. While 516K Robinhood users hold it today, if that number winds down to November’s 293K, look for other indicators of a stock market bottom.
Disney (NYSE:DIS) – While Disney has had to close its theme parks during the coronavirus pandemic, its streaming business might be massively undervalued. 422K Robinhood users hold it now. If that dwindles down to the 184K who held it in November, the stock market crash might be over soon.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:48 PM