Retail Dip Buyers Go Missing Right as Upheaval Convulses Markets

(Bloomberg) -- Some of the stock market’s most reliable dip-buyers are getting cold feet.

It’s happening in the options market, where retail traders spent just 43% of their total volume on bullish calls last week, according to Sundial Capital Research. That’s down from as much as 55% in February and the lowest share devoted to call options so far in 2021. Meanwhile, purchases of puts -- which protect against downside -- have increased. 

The pull back coincides with a violent upheaval in equity markets as Treasury yields rocket higher. Rising rates have hit richly valued technology shares the hardest, in turn dragging down stock indexes where the sector has an outsize weighting. With the S&P 500 on track for its worst monthly performance in a year, confidence of investors both big and small has been rattled, according to Sundial Capital’s Jason Goepfert.

“Deterioration under the surface of those indexes has dented investors’ optimism, and many of the indicators we follow have moved back into neutral, or even slightly pessimistic, territory,” Goepfert wrote in a note Monday. “Among options traders, that internal choppiness has led the smallest of traders to pull back significantly on their bullish bets.”

Yields on 10-year Treasuries have soared about 24 basis points since last week’s Federal Reserve meeting as traders moved forward bets for when the central bank will start raising interest rates. While that’s been a boon for sectors such as banks, tech stocks popular with retail investors have been battered, with the Nasdaq 100 Stock Index down more than 2% in trading early Tuesday.

The turbulence appears to be cooling retail investors’ appetites for call options -- a shift away from a dynamic that’s held through much of the last year as buyers moved in whenever prices pulled back from record highs. Small traders became a force in equity markets over the course of the pandemic, creating a cohort of dip buyers to cushion every wobble.

While the S&P 500 is down more than 1.6% Tuesday, the cool-down in bullish bets by retail buyers could be a signal that a bounce back is in the offing, since it prunes some of the speculative excess from the market, according to Goepfert. 

“Based on very recent history, we could make an argument that speculative activity has been wrung out among the traders most likely to show emotional extremes, and that should be good for stocks going forward,” Goepfert said. 

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