Are Individual Investors Leading the Market Right Now?

  • Trying to figure out what could happen in the market in the future
  • There is a lot of money in circulation right now, how much will end up in the stock market?
  • Seeing an interesting trend in investment behavior from Robinhood users
  • Divergence from institutional behavior, what does it mean?

Today’s blog post is more one of questions than one of answers.

As an investor, I am very confused right now. Mid March, I wasn’t too confused because I knew that the market could only go down so much more. Now, I am probably split 50/50 on whether the market could go up or go down. It’s a dangerous position to be in because, now that I haven’t been spending much money in quarantine (online shopping is still a thing), I have accumulated some cash that I want to “put to work.” Nothing would stink more than if I started making my money work, and next week, the market shot down because covid cases rise and states start closing down again. That said, if the stock market continues going up, I don’t want to miss out. 

In general, I get the sense that there is a lot of money in circulation now. People aren’t able to spend as much, and for the most part there are still a lot of people employed and many others collecting unemployment (I know this is very broad and slightly idealized). The Fed has kept rates low, and has been consistently pursuing expansionary policy, trying to toe the fine line. Speaking to an advisor recently, she informed me that there is a lot of money on the sidelines in a lot of accounts. 

The question I have is will that money find its way into the stock market? What are individual investors doing with their money now? What are institutions (a/k/a smart money) doing with the money on the sidelines? Are individuals and investors doing the same things with their money? Who is leading whom?

One of the most interesting fields to look at right now are the companies/etfs that are most hurt by covid. How do institutions feel about them and how do individuals feel about them?

The interesting trend from Robinhood users:

Looking at cruise lines, hotels, and airlines, Robinhood users have been and still are pretty bullish on all of these industries. Looking at the trendlines of users holding the names (green line) they all take very similar shapes. Even more interestingly, they all started buying mid March, as if the individual investors called the bottom of the market. 

For those of you unfamiliar with the platform, this is RobinTracker. It is a site that tracks how many Robinhood users hold every name. It’s a very cool tool that was just recommended to me by my colleague Dan Russo. 

So looking at the trend that we are seeing, for the most part the shape looks pretty similar across these industries. How did individual investors know to invest right around the bottom? Did these individual investors just get lucky in their bottom-fishing efforts? What were institutions up to? 

The founder of Chaikin Analytics, Marc Chaikin, created an indicator called Chaikin Money Flow, which is a proxy to what large institutions are doing. Just a note of caution, Chaikin Money Flow uses longer term inputs, whereas the robintracker charts are snapshots of the current day. 

Let’s see what the institutions think about these industries:

Looking at cruise line investment behavior from institutions, you can see that at the point that individuals started investing (white line, march 15 on the charts), institutions selling pressure remained visible (see the red chaikin money flow that persists after the white line). That pattern starts to improve but is still red. Looking at the overbought oversold indicator, which moves at a pace closer to what we see with the robintracker — and also accounts for individual investors — you can see that institutions aren’t always out in front of the net buying and selling of all of the names. In CCL for example, institutional flows remained lackluster for a while after March 15. The OBOS indicator, however, increased to overbought, possibly indicating that individual behavior was stronger than institutional behavior. We see something similar with Norwegian Cruise Lines (NCLH) in that the rate of distribution (red) improved over time, but was still net negative, while individuals were entering the market. Same thing with Royal Caribbean (RCL).

Interestingly, Hotels seemed to be more favored by institutions than cruise lines were. You can see that the Chaikin Money Flow is less negative overall, and that the oversold positions increased a lot faster to overbought positions. Looking at Hilton (HLT), institutions are still net red on the stock. The recent price improvement worked in conjunction with OBOS increase, in spite of the negative CMF persistency, possibly again implying some type of action by individual investors. 

Interestingly, Hotels seemed to be more favored by institutions than cruise lines were. You can see that the Chaikin Money Flow is less negative overall, and that the oversold positions increased a lot faster to overbought positions. Looking at Hilton (HLT), institutions are still net red on the stock. The recent price improvement worked in conjunction with OBOS increase, in spite of the negative CMF persistency, possibly again implying some type of action by individual investors. 

This last ETF tracks leisure and entertainment companies. We know individuals have been slowly accumulating since March, this is confirmed with the OBOS indicator increasing, and it appears that institutions didn’t join in until end of May/ early June. Inspecting the RobinTracker Chart does show a brief blip at the end of May/early June for individual investors. 

In conclusion, I have no conclusions, only observations and more questions. Given that we are seeing a lot of money in circulation, where will that money go? Will it go into the stock market? Looking at the purchasing trends of individuals, it looks like individuals somehow called the bottom of the market in March, and started investing in covid affected industries. This is interesting, because the individual investors didn’t wait for confirmation from institutions before taking action, they appeared to have either taken action first, or at least taken action concurrently with institutions. This trend was so prominent, that in some cases individual behavior may have even surpassed institutional power. Going forward, what does that mean for these industries? Will this type of behavior persist post Fed monetary expansion? Are institutions jumping in on affected industries because they are seeing price movements reflected by individual sentiment?

As I mentioned at the beginning, this blog was definitely more one of questions than one of answers. 

  
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