Day-Trader Fever Was Boiling Over Just Before October Surprise

(Bloomberg) — Retail investors, who have grown into a stock-market force this year, recently boosted their optimism to the highest level of 2020 — just in time for an October surprise.

Clients at TD Ameritrade (NASDAQ:) Holding Corp. increased their market exposure for a fifth straight month in September, pushing the firm’s measure of client positioning to the most bullish reading in two years, well before Covid-19 began roiling financial markets.

That backdrop may help explain why markets held up last week amid the turmoil of a presidential debate that raised concerns over a contested election outcome and then news that President Donald Trump and others in the highest ranks of U.S. government had contracted coronavirus. Through it all, the S&P 500 staged a 1.5% gain over five days, and by Monday afternoon the stock gauge had added another 1.4%.

The resilience of both equities and retail investors themselves is testament to the slightly-tongue-in-cheek saying in 2020 that stocks only go up. Conditioned to buy the dip, individual day traders are sticking to the strategy. With the Federal Reserve acting as a backstop with extremely supportive monetary policy, retail investors have been unbowed by everything from election uncertainty to a lack of new fiscal stimulus from Congress.

“Every time we’ve had a selloff, it’s been a nice opportunity,” said JJ Kinahan, chief market strategist at TD Ameritrade. “It’s like in football: You keep running the play until they stop you.”

A Goldman Sachs Group Inc (NYSE:). basket of stocks favored by retail investors is up more than 40% this year, and has just about doubled since the March bottom. In September, when the S&P 500 posted its first monthly decline since March and the tech-heavy tumbled into a correction, the index of retail favorites was virtually flat.

According to Kinahan, TD Ameritrade’s clients used the volatility to boost stock exposure. The most popular equity purchases at the brokerage in September included Tesla (NASDAQ:) Inc., Apple Inc (NASDAQ:). and Inc (NASDAQ:)., all companies that saw their shares drop at least 16% in the September selloff. So far in October they’ve remained buyers, scooping up shares of tech stocks including Apple, Kinahan said.

Clients at E*Trade Financial (NASDAQ:) weren’t rattled by a choppy September either. Retail traders at the brokerage, comforted by economic reopenings, loaded up on shares of materials stocks and undervalued energy firms, according to Chris Larkin, the firm’s managing director of trading and investment product. They also picked up tech giants like Facebook Inc (NASDAQ:). and Twitter Inc (NYSE:)., which have fared well during the pandemic. All told, the brokerage saw net buying in 10 of 11 sectors, with utilities being the sole holdout.

“They’re taking a little bit of a longer-term view and seeing that the economy is starting to open,” Larkin said. “For most people, they feel a lot better about where things are going and that’s why they’re starting to pick up some stock now.”

The presence of retail investors has exploded in 2020, encouraged by zero trading fees and, presumably, boredom during Covid-19 lockdowns. Calculations of their market share vary. Bloomberg Intelligence estimates they now account for 20% of equity trading, making them the second-largest group of investors in the market. At the higher end of the spectrum, strategists at Jefferies (NYSE:) LLC including Steven DeSanctis estimate about 40% of all trading volume comes from retail investors.

The pickup in retail activity has led some Wall Street professionals to decry euphoria in markets, warning of a situation similar to the dot-com era when individual investors were heavily involved. Others see the increase as a trend that’s here to stay.

“I don’t necessarily think it’s a bad omen,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “If you did see a broadening of participation in the market, that could provide a tailwind into year-end.”

©2020 Bloomberg L.P.

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