“Retail’s bullish conviction remains extraordinary,” Rubner noted. The retail flow showed an 11% preference to buy, as indicated by the firm’s call/put direction ratio, significantly higher than the 4% average observed over the past three months. This also represented the largest single-day call buying on the platform, according to his report. Remarkably, it was the 24th consecutive week with a “better-to-buy” options skew, tying the record for the longest bullish streak on the firm’s platform.
The surge in bullish options buying underscores the prevailing buy-the-dip mentality among retail traders, which has kept the stock market buoyant throughout the year. The S&P 500 has managed to navigate through a series of negative headlines related to trade, geopolitical tensions, and economic weaknesses, reaching all-time highs. Retail traders are actively taking on risk, even as other investors choose to sit out the rally. Earlier this week, Bank of America Securities reported that hedge funds opted not to buy during Friday’s dip, while JPMorgan highlighted that retail traders were purchasing even as institutional investors were de-risking, suggesting that the latter group contributed to the market pullback.
This trend is quite unusual in market dynamics. Traditionally, hedge funds were viewed as the “smart money” that led market movements. However, this year, retail traders appear to be the driving force behind equity price increases. Their decision to continue buying the dip has proven to be a sound strategy thus far. Following Friday’s dip, which marked the largest decline since April, the S&P 500 has risen nearly 2% this week.
On Thursday, Charles Schwab attributed its stronger-than-expected third-quarter earnings results to the uptick in retail trading activity, noting a 30% increase in daily trades on its platform compared to the previous year. Rubner from Citadel Securities remains optimistic about the equity market’s trajectory, pointing out that seasonal strength in November could propel the market even higher. However, he also cautioned investors to exercise caution in the coming weeks.
