Danger signal for U.S. stocks: Retail investors are "no longer buying the dip, selling whenever there's a rally"!

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The behavioral patterns of U.S. retail investors are undergoing the most noteworthy change since 2020—rather than buying the dip, they are now continuously reducing their positions by taking advantage of rebound opportunities.

According to the latest report from JPMorgan, total retail stock purchases in March dropped nearly 50% from the historical peak in January. Although last Wednesday saw a temporary market rebound and retail inflows were overall acceptable, the structure was clearly skewed toward fixed income ETFs rather than equities—which means risk appetite among retail investors continues to contract rather than recover with the market.

This behavioral shift could have a significant impact on the market. Retail investors have long been an important marginal buyer when U.S. stocks fall, and their "buy the dip" inertia has a natural stabilizing effect on the market. Now that this support is faltering, with institutions also not showing obvious entry, a funding vacuum between bulls and bears is increasing the market’s vulnerability.

A Historic Reversal: "Momentum Crowding" Surpasses "Dip Buying Crowding"

JPMorgan analyst Arun Jain stated that retail investors have been chasing momentum strategies since the end of 2023, and after entering 2024, have gradually taken profits from long-term winners while seeking opportunities in laggard stocks. Historically, retail tends to buy on declines and heavily increase positions in underperformers over a three-month window—since 2020, the average return of this "left tail buying" strategy has been positive.

However, recently this behavior has experienced a historic reversal: The degree of retail "crowding" into short-term momentum names has, for the first time, surpassed that into laggards. This means retail investors currently still hold high-beta assets (the degree of crowding is at the 92.5th percentile, highly consistent with short-term momentum), and are no longer replenishing low-volatility (i.e., currently lagging) stocks. Meanwhile, retail continues to cut exposure to cyclical assets.

This fundamental change in behavior marks a shift from retail’s previous role as a market "stabilizer" to a more defensive and even short-term risk-avoidance posture—a structural warning for the U.S. stock market, which relies on retail funds for bottom support, and should be closely watched.

Purchase Volume Plummets: March Data Nearly Halved From January Peak

On the data front, the decline in overall retail buying power in March exceeded expectations.

According to JPMorgan’s report, as of last Tuesday, retail maintained mild net inflows to ETFs, but continued net selling of individual stocks, even as the market rebounded during that period.

Last Wednesday, as the market strengthened, overall retail inflows were at the 76.6th percentile—seemingly healthy on the surface, but mainly driven by ETFs (96.4th percentile).

More critically, the incremental ETF buying was concentrated in fixed income ETFs (98th percentile), dominated by short-duration products such as SGOV, not in risky assets like stocks. For individual stocks, retail saw some inflows at midday (64.7th percentile), but then continued to reduce holdings in the afternoon, ending the day nearly flat (38.1st percentile)—a classic "sell on rebound" pattern.

Energy Sector Sees Largest Weekly Net Outflow in History

On the individual stock level, excluding the "Mag 7" (the seven big tech giants), retail investors were net sellers across almost all sectors during the week ending April 1, with staples as the sole exception.

Energy sector selling was especially severe.

Retail investors have been net selling energy stocks since February, but selling intensified sharply last week, peaking on Wednesday to mark the largest single-week net outflow on record, well above historical extremes. ExxonMobil (XOM), Chevron (CVX), and Occidental (OXY) were the main drags, with their Wednesday z-scores at -6.9, -6.6, and -5.6 respectively.

The memory chip sector is also under pressure. After Google launched a new compression technology that can reduce AI model memory requirements, Micron (MU) and SanDisk (SNDK) were the most heavily sold memory stocks last week, with z-scores of -2.3 and -3.0 respectively.

The overall tech sector was not immune either. While retail continued to buy retail favorites such as TSLA, MSFT, and NVDA, they were net sellers of tech stocks outside the Mag 7, pushing the overall sector position to a six-month low.

Risk Disclosure and DisclaimerThe market is risky, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their specific circumstances. Investing accordingly is at your own risk. ```