The Robinhood app on IOS and Android
The euphoric bullishness of regular investors might be exclusive to the rookie traders of the Robinhood community, debunking concerns that retail investors could be causing a bubble in stocks.
The majority of retail investors were actually selling during the coronavirus market rout and comeback, according to Barclays, which cited data from other brokers. Charles Schwab recorded net equity-selling among clients from February through May and TD Ameritrade’s investor sentiment index, a measure of client activity, has remained low.
Plus, the American Association of Individual Investors widely followed weekly bull-bear retail investor sentiment survey remains in deeply negative territory — signalling bearishness — far away from the levels that have marked euphoria in the past.
“The equity buying spree by the Robinhood community garnered a lot of attention recently and raised concerns about misplaced euphoria among ‘rookie’ investors,” wrote Emmanuel Cau, an equity strategist with Barclays, in a note Tuesday. Yet “other prominent brokerage platforms used by more experienced investors show continued selling since February.”
A flood of new retail investors into Robinhood alongside the market’s major rebound from the depths of its March low developed into a popular narrative that speculative retail activity was unrealistically driving the rally. The Silicon-Valley start-up added a reocord 3 million new accounts in the first quarter, while stocks experienced their fastest bear market on record. But Barclays noted that while households are the largest category of U.S. investors, at 37% of the total, Robinhood users are only a small number of that pool and other retail investors are simply not as bullish as their millennial counterparts.
“Individual investors still don’t share any level of enthusiasm for stocks that ‘professional’ investors do,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group, citing the AAII survey readings.
Traders on Robinhood — which serves over 10 million customers with the average client age being 31 — are making a big splash in tiny parts of the market, like penny stocks and bankrupt names, but not the overall market, Barclays believes.
The “strategies of ‘Robinhood’ investors appear to be have materially impacted a smaller portion of the market, it remains to be seen whether their actions could create ripple effects across the broader equity market,” said Cau.
Playing in penny stocks
Robinhood traders lived up to their outlaw name during the coronavirus market downturn, cashing in on some of the best performing stocks of the rebound with familiar names like airlines and cruise lines. The young investors booked profits — trading stocks with some of the best returns in the past two months — while other Wall Street veterans warned about retesting the March lows.
Because they were right, with the S&P 500 rallying 40% from its lows, they became an easy scapegoat for investors who had missed the rally and subsequently were accused of fueling irrational euphoria.
“Bullishness is clearly visible among this new section of rookie retail investors, who have become acclimated to equity exposure through novel trading platforms and apps,” said Cau. “Such investors, despite some potential handicap in technical skill levels, have been piling onto the equity markets since the market rout in March, raising concerns about misplaced euphoria.”
Founder of Barstool Sports Dave Portnoy became the face of these new inexperienced investors, trading in his sports bets for stock trading during the pandemic. With millions of Americans stuck in their homes during the quarantine, in the absence of sports gambling, some consumers looked to the stock market for entertainment. Even stimulus checks, meant to help the ailing from the pandemic, were used to trade stocks.
Barclays argues their overall market effect was negligible, however. The Robinhood traders did impact slices of the market, the firm said.
Robinhood investors are more exposed to so-called penny stocks than the typical retail investor, “given the low absolute share prices, their chances of higher return from such beaten down stocks are high, irrespective of their fundamentals,” said Cau.
Robinhood investors also had an affinity for beaten down familiar names, some that have even filed for bankruptcy, like Hertz, and other that have been shorted heavily by so-called smarter institutional investors. This has led to a sharp rally in such stocks over the past month and perhaps created more distortions in the prices of these names.
Robinhood investors’ approach has worked so far, with the smallest 25 stocks by share price in the Russell 2000 index averaging 124% in return since the market bottom in March, compared to just 28% on average for the biggest 25 names by share price, said Barclays.
“The recent interest on the part of Robinhood investors in buying equities seems to be more opportunistic than reflective of a profound change in the market structure,” said Cau.
Barclays analysis knocks down concerns that retail interest was growing into a mania seen during the Dotcom bubble in 1999. Regular investors were bombarded with commercials about high-flying internet stocks that eventually crashed when their value never materialized in short order.
“This is not 1999, at least not yet,” DataTrek Research said recently in a blog post. “Yes, there are echoes. But the Google search data shows the rush of new investors/traders is already waning. Once sports betting comes back online, we suspect it will decline even further.”
Enthusiasm over internet stocks drove almost all the retail investor misallocation of capital in the late 1990s, DataTrek added. Now, the Robinhood investors all buy into a jumble of low-quality names with nothing in common aside from a sub-$5 stock price or a one-off story.
“There are plenty of reasons to be cautious on stocks here, but retail investor enthusiasm is far down the list once you actually look at what they are buying and put their actions in historical context,” DataTrek said.
— with reporting from CNBC’s Michael Bloom.
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