The flipside of the retail rally

Technology trading

27.07.2020 – Special Report. Inexperienced, but recently enormously successful day traders have apparently become a real stock market factor in the USA. Interestingly enough, millions of bored gamblers probably also came into contact with shares during the corona lockdown. The problem: Most newcomers positioned themselves mainly long. Which now causes frowning among professionals.

Stock market boom

Several experts have sounded the alarm in recent days. Following the pattern “what goes up, must come down”, the financial blog ZeroHedge reported on the one hand to the new mass of inexperienced and young traders. The App Robinhood allows anyone to trade anywhere. The fees are falling and it is easy. Unfortunately, many of these kids only know the way to the top. In fact, the majority of these newcomers are apparently positioned long: Jesse Felder, financial advisor and freelance journalist, already warned in mid-June of an unprecedented rise in Google searches for the terms “call options” and “day trading”.

The baby boomers sell to their kids

Goldman Sachs recently took the same score. Tony Pasquariello, Head of Hedge Fund Sales, said that there is now a clear age division among retail investors in the stock market. The older generation sells in bulk, mostly via index funds or investment funds. The younger generation, on the other hand, is trading on the long side, as if it were 1999 again, and the latest euphoria on the stock market could certainly still carry a little weight. The stupid thing about it, as ZeroHedge assisted: The baby boomers sell their own shares to their children.

Trader-Teens

As early as mid-June, the blog CSInvesting had reported with a photo of three teenagers with an apparently incredible performance that the kids beat hedge fund managers in performance. And then, under the subheading “Are you sure you know all this to become a day trader?” The motto: Don’t get cocky. In fact, a few weeks ago Morgan Barna of Bloomberg registered in a few tweets the considerable increase in trading volume in the first two quarters of 2020.

Dotcom bubble again and again

Recently, The Wall Street Journal followed up with an article entitled “Everyone’s a Day Trader Now.” According to it, e-traders had opened 261,000 accounts in March alone. Robinhood opened 3 million new accounts. We think: respect, perfect timing – the second quarter for the bulls was one of the best ever. However, the WSJ warned that all this is very reminiscent of the dotcom boom at the end of the 1990s. There are now more than twice as many retail investors in the market as there were at that time. We had already presented various crash warnings at this point. Particularly alarming: The paper quoted unemployed traders who immediately invested the government support on the stock market.

Small individual shares are problematic

In addition, the WSJ, citing Barclays, noted an unpleasant trend: the more the newcomers focused on a specific stock, the worse the performance. One example was the stock of Ideanomics, which had been pushed on Twitter by a retired police officer. Shortly after the promotion, the short seller Hindenburg Research published allegations of fraud and the stock plunged by 21 percent in two days and then by another 40 percent. Apparently a typical case of pump and dump. Especially inexperienced investors fall into such traps.

The lessons of the bull market

The bottom line for us from all this is that the brilliant recovery since the Corona crash has apparently also been driven by many new, risk-averse retail investors. When several experts with their ear to the market warn against young and inexperienced gamblers, we should bear in mind the bubble on the Neuer Markt, which blew out a lot of air about 20 years ago.
The new investors had recently backed the right horse, because the world’s central banks are pumping vast amounts of money into the financial market because of Corona. There is nothing wrong with that. But those who only know the way to the top may be too careless and not recognize the signs of the times. For example, warning signals from Behavioral Finance – such as when taxi drivers give you unsolicited stock market tips. Such a sign was recently sent out by “Bild Online” with the article “Should I still join the stock market rally now?” Ergo: Protect yourself.
The Bernstein-Bank keeps an eye on these and other developments for you – and wishes you successful trades and investments!


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