Retailers haven’t given up on the stock market – and that could mean it will fall further

As investors look for potential signs of investor fatigue to gauge whether a bear market in US stocks may have more room to run, a team of analysts warned that retail traders still had room to get more negativity on stocks.

This, in turn, may indicate that a complete “capitulation” of the market may still await us, even as US stocks continue to rebound on Wednesday from last week’s decline.

Analysts at Vanda Research led by Marco Iacchini said in a weekly research note that while retail interest in US stocks reached their lowest level of the year so far on Tuesday, they are not yet at “capitulation” levels on a par with what we’ve seen. Before the stock shift in December 2018 and March 2020.

What would retail surrender look like? The Vanda team said that during the last two major sell-offs in 2020 and late 2018, total “surrender” didn’t arrive until retailers became net sellers of stocks.

Source: VandaTrack

Using a pair of charts, the Vanda team showed that retail investors became net sellers of stocks at least a few sessions ahead of the S&P 500 SPX,
It started to recover in both 2018 and 2020.

Vanda Resorts

Vanda Research

Retail investors are certainly a bigger force in the markets today than they were four years ago, with the average daily trading activity of small traders increasing exponentially, according to flow data collected by Vanda from many of the most popular discount brokerages used by retail traders, including In that Charles Schwab SCHW,
+ 0.03%And the
TD Ameritrade and others.

And retail interest isn’t the only measure of market “capitulation,” a term that represents the signs of exhaustion that typically appear before stocks drop. For example, when it comes to popular market-based capitulation metrics, it is worth noting that the CBOE Volatility Index, Wall Street’s “fear gauge” that reflects expectations of market volatility over the next 30 days based on activity in the options markets, has so far had a flash The most closely watched signal of exhaustion.

as such Market Watch In a story from May, investors typically associate a reading above “40” in VIX with surrender. The scale passed 80 in November 2008 and again in March 2020. But it hasn’t crossed that threshold so far this year.

Then again, every sale is different. During the March 2020 sell-off, the S&P 500 fell 34% in just 23 trading days. This year’s sell-off has been going on for a much longer period with the S&P 500 down more than 20% over about six months. Still, US stocks appear It headed for its worst first-half performance since 1932, according to Deutsche Bank.

Interestingly enough, when measured in terms of duration, the current bear market is already growing long in the tooth.

At more than five months old, the 2022 sale is already older than six other bear markets going back nearly 40 years, according to LPL’s chief financial market strategist, Ryan Dietrick. At that time, only the burst of the Internet bubble, the sell-off that followed the Great Financial Crisis lasted longer.

Whether stocks eventually rebound from here will depend on how inflation and economic growth expectations evolve over the coming months, as Fed Chair Jerome Powell has repeatedly promised that the Fed will rely on data – and the Fed’s outlook remains a major concern for markets.