U.S. Stock Market Trend | Castle Securities: Diminishing Retail Investor Sentiment May Signal a Short-Term Rebound in U.S. Stocks

Citadel Securities said that retail investor sentiment has cooled, which may indicate that the U.S. stock market could rebound in the near term.

Scott Rubner, head of stocks and stock derivatives strategy at Citadel Securities, said that traditionally, retail investors have been one of the most bullish groups in the market. Now, retail investors are starting to show initial signs of capitulation in both the spot and options markets, and retail participation is no longer a one-way source of demand.

Based on data from the company’s platform, last week individual traders became net sellers of U.S. stocks and options. Since January 2020, this has happened only 18 times. This bearish shift is clearly a departure from the recent pattern of retail investors consistently buying the dips.

Citadel Securities data shows that, historically, periods when retail investors show signs of fatigue have often been accompanied by stronger short-term returns in the U.S. stock market. Within two months after similar signals appear, the S&P 500 index has about an 82% probability of rising, with an average gain of 4.1%.

Although retail investors were still net buyers last month, participation slowed significantly. In March, net notional outlays fell by about 55% compared with the previous month, and were down about 70% from the January peak.

This slowdown came after asset prices experienced sharp volatility. Escalation of the Middle East conflict disrupted the energy market; the S&P 500 index fell by about 5% in March. Brent crude oil has risen by about 80% so far this year, further intensifying inflation concerns and dragging down the performance of risk assets.