Retail investors have been very good about buying the dip in the past few years. As institutional and other non-retail players shrink in fear, regular folks with Fidelity and Robinhood accounts and TD Ameritrade accounts pile money into the market.
It s worked out well for them so far : with the S&P 500 scoring many all-time highs following the dips see chart below But recently retail investors have been less excited about dips.
Analysis from Vanda Research recently showed that for retail investors buying when stocks are lower, the magnitude has been a little underwhelming relative to previous sell-offs. In a note from DataTrek, hedge fund veteran Nicholas Colas has an explanation as to why retail investors are acting this way: it s because retail investors have been desensitized to smaller sell-offs and are waiting for the big drops.
Based on everything from Google search volume data related to popular interest in investing to Fidelity s daily trade blotter is yes, but only if it is a big drop, Colas wrote.
At least 5%.
Colas said a grind lower won't do it. Investors have seen a rollercoaster market since the Pandemic began — for new investors this would be their entire career in investing — so a drop needs to be meaningful enough to make an impact. The last time the S&P 500 dropped 5% was in October 2020. Especially, since many retail investors have shown an impressive appetite for stocks with substantial volatility like GameStop, AMC, Hertz and more.
Colas is a proponent of Google Trends as a barometer for new entrants in the market, how many people are signing up for brokerage accounts and starting to invest something that has been borne out over the past two years. During that time, sell-offs coincided with big account openings as new investors bought the dip. However, the September s drop of about 2.1% didn t do much for people searching on the Web.
This hypothesis, of course, won't be tested until the next 5% or more drop.