Retail Euphoria Turns To Pain As Rates Wreck Tech

By Elena Popina, Bloomberg reporter and Markets Live commentator

It’s been a familiar pattern for most of the past year: Newbie investors chasing upside in single stocks as professional money managers position for more trouble. This month, the sentiment gap between these groups has all but disappeared.

Blame that on a selloff in tech high-fliers popular among amateur investors and a widening rotation into value names. Declines in stocks from Tesla Inc. to Plug Power Inc. slowed retail traders’ appetite for upside calls and triggered a spike in demand for downside loss protection, data compiled by Barclays show.

The individual-stock skew, or cost of hedging against single-stock losses relative to gains, spiked as a similar measure for the broader index declined (as gains in one part of the stock market offset losses in the other.) As a result, a months-long gap between retail euphoria and institutional skepticism all but disappeared.

“The equity selloff had a larger impact on retail investors as large-cap tech/growth stocks which generally overlap with retail favorites took a bigger hit, relative to other sectors,” Barclays strategists including Maneesh Deshpande said in a note to clients.

“The great disconnect between the index and single stock skew mean reverted as investor demand for vega dropped.”

That’s a sea-change from a long-term pattern that saw two outstanding puts for every call on an index level and 0.85 puts for every call in the single stock-space, the strategists’ data show.

As bullish sentiment among retail traders faded during a rout, so did newbie traders’ participation. As yields rose and the Nasdaq 100 plunged into a correction, retail traders stepped back and trading activity among institutional investors topped retail for the first time since May 2020.

It doesn’t help retail traders that the yield on the 10-year Treasury hit a high of 1.74% on Thursday as investors continued to digest yesterday’s Fed decision and press conference from Chair Jerome Powell. That pushed Nasdaq 100 futures down 1.1% and S&P 500 futures down 0.4%.