Leading the US stock market! What are retail investors buying?

In the US stock market stage in May, retail investors continued to play the leading role, taking advantage of the low market liquidity to dominate price movements and drive rounds of market trends.

JP Morgan's latest report shows that retail investors net bought $23 billion in May, a decrease of about $17 billion compared to March and April, but still roughly in line with the annual average level of $25 billion, comparable to the retail frenzy period in 2021.

In stark contrast to previous months, retail investors only had 3 days of net buying exceeding the $2 billion threshold in May, while there were 4 net selling days, mainly concentrated in the last two weeks. The sentiment indicator once fell to a low of -0.7.

At the same time, retail investors' investment returns recorded a growth of 4.9% in May, slightly lower than the overall market performance of 6.1%. Year-to-date, their investment portfolio has lost 2.6%, while the S&P 500 index has risen by 1.8%.

Tesla in high demand, NVIDIA continues to be sold off

In the past week, retail traders net bought $6.8 billion, which is 0.4 standard deviations higher than the average level over the past year.

Among them, ETFs contributed $4 billion in net inflows, with increased demand for fixed income ETFs, primarily led by money market and ultra-short-term ETFs, such as SGOV rising by 2 standard deviations, while interest in GLD and IBIT remains at 0.5 standard deviations.

In terms of individual stocks, retail investors aggressively bought $4.4 billion of Tesla, coinciding with an 8% drop in the stock. Notably, May 30 marked the largest single-day net buying volume in two months. On the other hand, NVIDIA continued to lead the selling flow, with a net outflow of $2.2 billion, setting a record for the longest consecutive selling streak of 17 days since 2018.

Sector-wise, materials and financial stocks saw outflows of 1.4 and 1.0 standard deviations, respectively, while healthcare and energy sectors received excess demand of 1.5 and 1.1 standard deviations, respectively.

Retail bets on small-cap stocks and AI secondary themes

The report pointed out that in May, retail investors entered a "rotation mode," shifting from locking in profits on core holdings (such as NVIDIA and the "Seven Giants") to higher-risk corners of the market.

Small-cap stocks (such as the IWM ETF) and AI-related secondary themes (such as data centers, quantum computing, and nuclear energy) have become new favorites. Vanda warned that while this behavior is not uncommon, it reflects a complacent sentiment that may not align with existing macro risks, potentially signaling that the current stock market rally is entering its "final innings."

JP Morgan warned that while this behavior is not rare, it "suggests a possible complacent sentiment that may not match the still-existing macro risks, thus reinforcing our judgment that the current stock market rally is in its final stages."

Within small-cap stocks, data centers, quantum computing, and nuclear/power-related stocks are benefiting from retail rotation. The institution noted that typically, when retail fund flows begin to dry up, it raises concerns about the sustainability of these stocks' upward momentum.

Sentiment data from social media platforms like Reddit and WallStreetBets also corroborated this trend.

In the past month, the most active stocks included large tech stocks (NVDA, TSLA, AVGO, PLTR), meme stocks (GME, HOOD, HIMS), and AI/data center newcomers (CRWV). Positive sentiment is concentrated on recently strong-performing or AI-concept stocks, while negative sentiment revolves around poorly performing or controversial companies (such as DJT, GLD, RKLB, META, BA, UNH, MRVL).

The rise of the options market, retail market share climbs to 18%

Retail investors are not only active in the spot market, but their participation in the options market is also increasing, with market share returning to 18%.

In the past week, retail investors sold $4.1 billion of Delta and $23 billion of Gamma, setting a record for the largest Gamma imbalance since mid-February. Among these, S&P 500 options contributed $18 billion to the Gamma imbalance, while Nasdaq options accounted for $3 billion, with trading volumes of calls and puts being relatively balanced.

This indicates that while retail investors are using options tools to amplify leverage and hedge risks, they are also injecting additional uncertainty into market volatility