Retail investors have clung to Apple and Tesla even as the overall market craters, according to Vanda Research. Should those stocks fall, it could signal that everyday traders have given up on the market – and that a bottom is near. Investors have concentrated their purchases in the two tech stocks, giving them heavy inflows since the resumption of the 2022 sell-off in mid August, said Marco Iachini, Vanda’s senior vice president. The two stocks alone make up an estimated 34% of the average retail investor’s holdings, he said. Iachini said these stocks have performed better than benchmarks despite the market frenzy, likely because of concerns over shorting Tesla and Apple’s position as a defensive household name. A significant drop in either would worsen an already bleak 2022, he said, potentially to the point that these investors give up. “A positioning puke in these two stocks could be the coup de grace for retail investors’ PnL,” Iachini, referring to an acronym used to describe an investor’s profit-and-loss statement. “Investors should follow price action from Apple and Tesla closely, as these two stocks may be the last bastions of hope for the retail community.” That drop may not be far off. Apple’s shares slumped Wednesday after Bloomberg reported the company was walking back plans to increase new iPhone production . That could be enough to scare some already jittery investors, Iachini said. He said Korean retail investors, who account for about 2% of Apple’s retail holdings, selling off the news would likely mean forced liquidations. That could affect foreign stock holdings. Why retail capitulation matters A new index from Vanda gauging retail capitulation, meaning the act of giving up on the market, has shown sentiment and hard money data has continued sliding. The index is closing in on levels that would mark an equity market bottom, Iachini said, but retail investors have helped slow the fall. Intraday trading data suggests retail investors, who have made up a larger share of the markets since the pandemic began, “bought the dip aggressively” on Monday and Tuesday. “This goes to show that retail investors’ flows have been pivotal in cushioning the equity sell-off, in our view,” he said. Iachini said people view capitulation as a contrarian indicator, meaning it tells investors when to do the opposite of a sentiment. In this case, a capitulation could signal a prime time to buy low for investors. But some have warned against betting on contrarian indicators in this moment, noting that there’s a pandemic-induced gap between what people are saying about the market and how they are actually investing.
© heardonwallstreet.com