Citadel Securities’ audacious market call is spot on

Shuli Ren, Bloomberg

With global stocks hitting record highs and meme trades making a comeback, investors are naturally asking if it’s time to take profit. Some institutional managers are going a step further, shorting shares of unprofitable US tech companies that have seen sharp upswings.

Before talking about froth, one must ask if we are witnessing a structural change in the market. After all, if a different cohort is dominating trading, lofty valuations by historical standards can no longer predict future pullbacks.

Scott Rubner, Citadel Securities’ head of equity and equity derivatives strategy, has observed that mom-and-pop investors are market leaders this summer. That spurred him to make an audacious call two weeks ago: He expects a solid run in the S&P 500 all the way into the Labor Day holiday in early September. His prediction has panned out — so far.

Retail accounts for 20% of total trading volume in the US, just shy of the 24% peak reached in early 2021 when meme stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. entered the world stage. “Ever since April, retail investors have been resilient and fully participating in this rally,” Rubner wrote in a note.

In addition, individual investors seem to follow a strong seasonal trend, trading briskly in June and July before dropping off by September when school reopens. Fund managers, on the other hand, often step away for summer holidays.

Insights like these from Citadel Securities are invaluable because the market maker handles more than a third of all US retail stock trades. In fact, the brokerage came into prominence in the era of meme stocks.

Other Wall Street analysts are starting to recognize day traders’ lasting impact, too. In a recent note to clients, Goldman Sachs Group Inc. observed that historically, sharp increases in speculative trading signaled abnormally high returns within a one-year horizon. In other words, don’t stand in front of a speeding liquidity train.

With retail participation twice as high as pre-pandemic levels, it would be presumptuous to brush them aside as dumb money that will just go away. On the contrary, many day traders are savvy and some of their behaviors reflect the same kind of worries that plague institutional money managers.

For instance, the resurgence of meme stocks could be a manifestation of the barbell strategy retail traders have been deploying — pouring billions into low-cost index funds on one end, while flocking to the stock market’s discount rack for, in their view, some good deals, such as Opendoor Technologies Inc. and Kohl’s Corp. After all, this rally needs to broaden from a handful of Big Tech bets: If you invest $1 into the S&P 500, 33 cents would go to the Magnificent Seven stocks.

Or is the one-way rally a bit too calm, despite President Donald Trump’s unpredictable tariff negotiations? Retail investors have been piling into volatility-based products lately, such as 2x Long VIX Futures ETF, as a way to hedge their portfolios and protect against sudden market meltdowns.

There’s a change of guard at the top of the market this summer. With retail investors taking the lead, professionals must be pondering if they should chase the rally, or risk explaining why their portfolios are underperforming. Social media “finfluencers,” a new breed of financial advisors, might have some thoughts.

Courtesy Bloomberg/Shuli Ren