Castle Securities: Retail Investor Sentiment Weakens; Historical Patterns Suggest a Short-term Rebound in U.S. Stocks

A Castle Securities strategist said that retail investor sentiment has been cooling, which may indicate that the U.S. stock market could rebound in the short term. Scott Rubner, head of stock and equity derivatives strategy at Castle Securities, said that based on data from the company’s platform, last week individual traders turned into net sellers of U.S. stocks and options. Traditionally, retail investors have been one of the most bullish groups in the stock market. Since January 2020, this has occurred only 18 times. In the weeks before that, the Iran war and a surge in oil prices triggered sharp volatility in the stock market. In a report to clients on Tuesday, Rubner wrote: “We are now seeing initial signs of capitulation among retail investors in both the spot and options markets, and retail participation is no longer just a one-way demand source.” This clear shift toward bearishness sharply departs from the pattern of retail investors consistently buying the dip in recent years. But Castle Securities data shows that historically, periods when retail investors grow fatigued are often accompanied by stronger short-term returns in U.S. stocks: after similar signals, the S&P 500 has about an 82% probability of rising over the next two months, with an average gain of 4.1%. (Cailian Press)