A couple of highly amusing articles released over the past several weeks suggested retail investors, homebound and bored during the coronavirus lockdown, became more adventurous in markets, turning to options and riskier strategies in an effort to break the monotony.
I’m more of a reader myself, but I imagine binge-watching Netflix does get tedious, and it’s not difficult to conjure a scenario in which a nation of Seth Goldens simultaneously decide to treat their E*Trade accounts even more like online poker than they were already prone to doing.
But, despite some evidence to support that narrative (e.g., ~13% of options volume now accounted for by trades of just one contract), some of these tales may (ironically) be the product of journalists who are similarly homebound, and similarly tired of binge-watching Netflix.
With that in mind, JPMorgan suggests in a new note that while retail investor dip-buying and that familiar “FOMO” (fear of missing out) feeling may well have been behind some of the bounce off the March lows, Joe E*Trade wasn’t the “main driving force”.
“We had argued before [that] US retail investors sold around $260 billion of individual equities during February and March in addition to the around $50 billion selling of equity funds”, the bank’s Nikolaos Panigirtzoglou writes, adding that the $260 billion of individual stock selling during February and March “was revealed by NYSE margin account data, which are predominantly used by retail investors and allow for maximum leverage of 2x”.
April’s NYSE margin data shows a roughly 40% reversal of that selling, suggesting around $107 billion in buying last month.
And yet, US-domiciled equity ETFs and mutual funds saw a net $15 billion in outflows during April, Panigirtzoglou says. (Note: While I can reproduce JPM’s mutual fund flows visual using ICI data, a quick read of the same ICI net flows figures for ETFs doesn’t match, so consider the figure a combination of ICI mutual fund data that I’ve verified, and ETF figures from JPMorgan’s research – I assume they are netting something I’m not).
He takes the buying implied by the NYSE margin data and subtracts the mutual fund and ETF net total to get $92 billion. That “reverses around 30% of the previous negative net equity flow impulse during February and March”, he writes, calling that flow impulse from US retail investors in April “relatively modest”.
So, if we assume these figures do, in fact, suggest that retail was not the main driver behind the bounce, what does Panigirtzoglou say accounted for the majority of the bullish impulse?
Well, short covering and re-leveraging from larger players, including trend followers. “Other flows related to short covering, rebalancing and vol normalization by institutional investors have likely been multiple times bigger that the net equity flow by US retail investors”, he notes.
He flags CTAs as the space that’s the “most advanced” down that road. Specifically, JPMorgan says “the average z-score of the short and long look-back period momentum signals for the S&P 500 entered positive territory two weeks ago for the first time since February, and has now moved to significant positive territory of +0.6 stdevs”. That’s even more true for the Nasdaq.
But Panigirtzoglou sees scope for further short covering, even as CTAs (usually the “first movers”, as it were) have now completed their initial re-leveraging.
“The Quantity-On-Loan on all stocks and equity ETFs globally still shows that of the around $500 billion of the additional shorts that were placed between mid-February and mid-March, around 60% has been unwound so far with the pace of unwinding stalling over the past 2-3 weeks”, Panigirtzoglou goes on to say, adding that “the short covering remains much less advanced in the equity ETF space [where] the Quantity-On-Loan for SPY… remains stubbornly elevated”.
So, at least on this analysis, there’s still ample scope for things to run further, especially with reopenings and policy accommodation stoking optimism.
“We acknowledge the elevated positioning by CTAs’ and momentum traders’ on US equity futures”, Panigirtzoglou remarks, in the summary bullet points. “[But] we still find that there is short base in equities to be covered by other types of investors”.