Stock Market Crash: The Battle Between Retail Traders And Smart Money – Forbes

One thing is certain, the current coronavirus stock market rally has seen immense participation by retail investors. In fact, it would not be an exaggeration to say that retail investors have brought some mammoth moves into some of the stocks. Their stock trading strategy broke every single investment rule. Without their support, the stock crash would have been a whole different story.

Are Stocks Going Up or Down?

The Dow Index is up 50% from its Covid-19 crash, and the Dow price has crossed above its 100-week average price. The S&P 500 index, which is a better representation of the overall stock market, is also up 52% from its coronavirus stock market low. The S&P 500 index is trading nearly ten percent higher than its 100-week average price—this confirms that traders are not only buying stocks but are comfortable holding their long positions. 

Why did retail investors flock to the stock market?

• Retail investors have spent a lot of time sitting at home because of coronavirus lockdown. They used their free time in investing stock market. 
• Low brokerage cost: the term Robinhood traders became popular because retail investors had the opportunity to participate in the market with virtually zero commissions. 
•  The stock market crash during the coronavirus pandemic period triggered one of the fastest declines in the stock market. Retail investors saw the opportunity, and they cashed on this stock market crash in what is known as ‘buying the dip’. 
•  The 2007 financial crisis gave retail traders some sort of trading blueprint concerning companies that were on the brink of bankruptcy or had already filed for bankruptcy. Retail traders had the belief that governments would not allow a repeat of the 2007 financial crisis, and that a bailout would happen. They were right to a large extent as many companies were bailed out, not just in the U.S., but also in the U.K and Europe as well. 
• The coronavirus vaccine news made many stocks trade like cryptos. Some of them increased in value by more than ten times, and the gains that they produced were something that attracted the retail crowd. After all, the entire crypto market was mainly popular because of Bitcoin’s price and its hype. 

What About Smart Money?

Institutional money, on the other hand, has been calibrating the move very carefully. The consensus among the smart money is that the current stock rally is based on hype, a bubble that will no doubt pop. 

The smart money had been saying this all along; it didn’t believe the bounce in the S&P 500 and Dow Jones when they moved off their coronavirus stock crash level by 10%.

Stock Market Crash Opportunity Missed By Institutional Investors

The coronavirus stock market rally continued, and S&P 500 and Dow Jones recovered more than 50% of their losses. The CFTC data continued to show that smart money is not getting involved. In fact, in some of the more significant stock ETFs, such as SPY and VOO, the fund flow did not show much in the way of convincing inflow of capital. Basically, there were insufficient signs that could signal that the stock market recovery was broadly supported by institutional money. 

Pundits Say It is A Bubble

The market pundits labeled the coronavirus stock market as a bubble, and they maintained their comparison of how the stock market crashed during the financial crisis after its first rally.

It is essential to mention here that it wasn’t the entire pool of smart money that missed the rally; there were many bright spots. For instance, during the current earning period, it was pretty clear that major Wall Street banks did well in their stock trading business.

Nonetheless, the fact is that today we are looking at a situation where the Nasdaq NDAQ index has made several record highs. The S&P 500 is within a whisker distance of reaching its record high, and the Dow Jones—the weakest index of all—is about to dig itself out of its current hole and become positive for this year. 

Despite all this, market pundits are still beating the drums that the second wave of layoffs are coming, and that is likely to trigger the stock market crash. 

Fed Saved The Stock Market Crash

The reality is that the current stock market rally, and the economic recovery, in the U.S. are mainly supported by the Fed. As mentioned earlier, one may not want to fight the Fed, as it typically has a bad ending. 

As long as the stock market has monetary and fiscal policy support behind it, the chances are that the coronavirus stock market rally will continue its upward journey. 

Decision: Bubble, Stock Market Crash or Stock Recovery?

It is up to individual investors if they want to keep seeing the stock market as a bubble or an opportunity. The reality is that the Fed is ready to support the stock market if there is a crash. The Fed still has one bullet left, which everyone can see, and that is their direct intervention in the stock market—the Fed buying the stock ETF in the same way they are purchasing the corporate bond debts now. 

The Bottom Line 

The bottom line is that retail traders have played a large part in supporting this stock rally, they bought stocks which crashed badly. Some of them were bailed out, and retail traders got a handsome dividend. For some, there was a bubble bust. 

Smart money is still waiting to get fully involved, and for institutional investors, the economic recovery isn’t a V-shape. They are waiting for retracement or another stock market crash.