From leveraged ETFs to digital currencies, the U.S. market is undergoing a "subtle change."

Despite positive economic data, support from the Federal Reserve's interest rate cuts, and the stock market nearing all-time highs, the U.S. financial market is undergoing a subtle shift.

Data compiled by Bloomberg shows that this month, U.S. leveraged ETFs, which were previously favored by retail investors, experienced an outflow of approximately $7 billion, the highest level recorded since 2019.

At the same time, as leveraged bets were liquidated, the cryptocurrency market saw a temporary evaporation of about $300 billion in market value. Additionally, major U.S. stock indices ended their streak of consecutive gains. The S&P 500 Index and the Nasdaq 100 Index both recorded their first weekly decline in a month.

Notably, it is those retail investors who were once considered "latecomers" that are leading this retreat. They demonstrated foresight during the market rebound in the first half of this year, and their current cautious stance may once again become an important signal for the market to watch.

Retail Investors Take the Lead, Locking in High-Risk Asset Gains

Analysis indicates that this round of large-scale asset withdrawal is not a panic signal, but rather a choice by investors to lock in profits after months of market euphoria, preparing for potential volatility in the future.

Take the Direxion Daily Semiconductors Bull 3x Shares (SOXL), which aims to triple the semiconductor index; despite the fund rising 31% this month, investors still withdrew over $2.3 billion from it. This clearly shows that some traders chose to exit during the upswing.

Similarly, the TSLL fund, which aims to amplify Tesla's stock price fluctuations, is also experiencing its largest monthly outflow ever, amounting to approximately $1.5 billion.

Steve Sosnick, Chief Strategist at Interactive Brokers, commented:

“Active traders are still willing to chase rapidly changing stocks, but their interest in buying the dips and chasing highs has indeed weakened. I wouldn't call it 'indigestion'; perhaps it's more like a bit of 'food coma' after a feast.”

Cautious Sentiment Spreads, Institutions Begin Hedging

As market sentiment shifts, professional asset management firms are also adjusting their strategies, adopting a more cautious stance.

Andrew Slimmon, a portfolio manager at Morgan Stanley Investment Management, pointed out:

“The market is overbought, especially in those super speculative stocks. These stocks are approaching bubble territory, which is a very dangerous signal.”

Some institutions have already begun to take action. Lido Advisors, which manages $30 billion in assets, is implementing hedging strategies, such as selling covered call options to generate income and buying put spreads to provide protection in the event of a market pullback. Its Director of Portfolio Strategy, Nils Dillon, stated:

“We are walking a fine line—when does bad data start to become detrimental to the market? That is the dilemma the market is facing this week.” Lara Castleton, Head of U.S. Portfolio Construction and Strategy at Janus Henderson, also stated that client interest in fixed income assets is rebounding. She warned:

“Buying based on optimism about Federal Reserve rate cuts and a loosening cycle is dangerous.”

The firm advises clients to focus on fundamentals, favoring high-quality bonds such as government bonds and corporate credit. Greg Peters, Co-Chief Investment Officer of PGIM Fixed Income, believes that “the market seems a bit tired,” and the firm has allocated about 30% of its risk to short-term assets.

Signals from "Smart Money"?

This retail-led retreat should not be overlooked.

During this market cycle, retail investors, often seen as "dumb money," have repeatedly outpaced institutions. Eli Horton, Senior Portfolio Manager at TCW Group, stated:

“Looking back to when the market hit a new low in April, it was actually retail investors bottom-fishing. You could call it a ‘retail-driven rebound’ rather than a ‘Wall Street-driven rebound.’”

Now, these investors are the first to withdraw from the most bubble-prone areas of the market, perhaps sending another signal worth heeding for market participants. While this does not mean a widespread recession is imminent, it indicates that market fragility is increasing, and a quiet recalibration has begun