All historical trends are no longer valid! U.S. stock retail investors catch Wall Street investors off guard

U.S. retail investors are challenging Wall Street's traditional investment logic in unprecedented ways.

Mark Hackett, Chief Market Strategist at Nationwide Investment Management Group, stated that the retail investors' "buy the dip" strategy has thoroughly puzzled institutional investors, with "all historical trends no longer being effective."

The strong rebound in U.S. stocks on Monday confirmed this viewpoint. Following a sell-off last Friday triggered by weak employment data and the implementation of tariffs, retail investors quickly entered the market to buy the dip, pushing the market to almost completely reverse its downward trend. According to data from Interactive Brokers, some retail investors even began buying on Friday, with the brokerage's cumulative net stock purchases surging 78% compared to the previous week.

Hackett pointed out that institutional investors are currently hesitant to short the market because the buying power of retail investors has rendered traditional market correction patterns ineffective. Despite the S&P 500 index's price-to-earnings ratio reaching 22 times and rebounding nearly 30% since the April low, the seasonal pullback that should have historically occurred has not materialized as expected. He advised against "betting against retail investors" at this time.

Retail Investors' "Buy the Dip" Belief

Recent market dynamics are the latest example of retail influence. Last Friday, amid multiple negative impacts from disappointing employment data, the initiation of tariffs, and geopolitical risks, the market exhibited a "typical reaction" from institutional investors—selling off. However, this downward trend did not persist.

Mark Hackett analyzed:

"For me, Monday's almost complete reversal is a reflection of retail investors being trained in the concept of 'buying the dip,' which has left institutional investors thoroughly confused at this point."

He added that this pattern became quite evident in April and May of this year, when institutional investors generally stepped back to observe and maintained conservative positions, while retail investors actively bought on dips.

Data also supports this. According to data from retail brokerage Interactive Brokers, the cumulative net buy orders on its platform surged 78% last Friday compared to the previous week, with retail investors even taking action before Monday. Last Friday coincided with the S&P 500 index recording its longest consecutive four-day decline since May 23. Hackett believes that this tried-and-true strategy has led retail investors to "foster a sense of inevitability in the market's recovery."

History is No Longer a Reliable Guide

According to pre-pandemic market logic, a series of recent signals should have indicated a more prolonged pullback. Mark Hackett pointed out that in the past, when the market had rebounded nearly 30% from its lows, the S&P 500 index's price-to-earnings ratio reached 22 times, and it simultaneously entered the traditionally weak months of August and September, "this was precisely the moment when the market expected a consolidation and a downward trend in the coming months."

However, reality is not so. "All historical trends are no longer effective," Hackett emphasized. This has directly led institutional investors to be reluctant to short the market easily, as they cannot ignore the powerful buying force of retail investors. The rise of retail investor power is not a coincidence. During the pandemic, more convenient trading tools, lower technological barriers, and more free time collectively created conditions for them to enter the market. Thomas Shipp, head of equity research at LPL Financial, summarized the investment characteristics of retail investors in a report in July:

"Sensitive to momentum, focused on thematic investments, and insensitive to high valuations."

This summer, they even demonstrated a similar "herding" influence on individual stocks like OpenDoor (OPEN) as they did in 2021.

The "Terrifying" Chase of Institutional Investors

The strength of retail investors has put Wall Street professionals in a dilemma. Many institutions held a very conservative stance at the beginning of the market rebound in April this year, missing the best entry opportunity. Hackett bluntly stated:

"Now you are chasing from behind, which is a very terrifying situation."

Institutional investors also face the challenge of portfolio management. Due to the excessive weight of a few large tech stocks in the index, constructing a truly diversified portfolio has become exceptionally difficult. At the same time, the market's experience in 2022 has left institutions feeling apprehensive. That year, after the outbreak of the Russia-Ukraine conflict, the market experienced a prolonged weakness, but starting in October, "for what seemed like no real reason at the time," the market launched a very rapid rebound.

"Do not bet against retail investors, at least not now," Hackett offered his core advice. He believes that institutional investors are currently being "stirred up by retail investors, making it impossible to do what they want to do."

Cautious Outlook and Year-End Expectations

Despite the strong power of retail investors, Mark Hackett also cautioned that this "buying on dips" strategy is not infinitely effective, especially against the backdrop of high market valuations and increasing economic uncertainty. He stated:

"Now is not the time I would shift my portfolio to be aggressively risky."

Regarding the market outlook, Hackett expects the market may enter a consolidation phase before September. After that, as potential positive factors such as U.S. government spending plans begin to emerge, the market may build momentum for a year-end rally.

But for now, the game between Wall Street and retail investors is far from over, and the historical failures are becoming a new reality that all market participants must face.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk