Retail investors played a big role in both wild market rout and the reversal, data suggests

If you didn’t look at the markets until 4:05pm on Monday, not much happened.

January 24 was “one of those days that will look like a blip in the market’s historical record,” DataTrek’s Nicholas Colas wrote in a note. “However, if you were looking at the screens during the day, you won’t soon forget today’s action.”

The Cboe Volatility Index (^VIX) surged as high as 38.94 — highest since October 2020 — and the S&P 500 sank 3.8% by around 12:30pm before surging back to finish up 0.28%. The Nasdaq (^IXIC) fell nearly 5% in midday trading before ending in the green while the Dow (^DJI) ended the day up 99.13 points (+0.29%) after falling more than 1,000 points intraday.

LPL Chief Market Strategist Ryan Detrick pointed out that while the market has dropped as much as it did Monday 88 times since 1950, yesterday “was only the third time stocks closed higher when the dust settled. (Both of the others were Oct '08).”

Retail investors were a key driver of the selloff, according to Bloomberg reporting of JPMorgan data. At the same time, according to Colas, "retail investors were out in force today and buying this pullback.”

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Retail investors and a 'spasm of panicked selling'

Throughout the pandemic, which was characterized by the rise meme stocks like GameStop (GME) and new platforms like Robinhood (HOOD), retail investors have been exerting a balancing force on the market by stepping in to buy amid market dips.

“We use Fidelity’s data of most-traded names as a proxy for this cohort’s activity,” Colas wrote, referring to Fidelity's tracker of self-directed retail investors. "Order volumes were on average 2-3x higher than in recent days," with top names including Tesla (TSLA), the 3x Nasdaq ETF TQQQ, Apple (AAPL), and Nvidia (NVDA). GameStop and AMC (AMC) were also bought significantly more, suggesting that retail investors were even snapping up meme stocks in afternoon trading.

Other data suggested heavy selling from retail investors in the morning, as reported by Bloomberg: "In a spasm of panicked selling early Monday, retail investors offloaded a net $1.36 billion worth of stock by noon, most of it in the first hour, according to data compiled by JPMorgan Chase & Co. strategist Peng Cheng."

A trader claps on the floor of the New York Stock Exchange (NYSE) as the Dow Jones Industrial Average turns positive on January 24, 2022 in New York City. (Photo by Spencer Platt/Getty Images)
A trader claps on the floor of the New York Stock Exchange (NYSE) as the Dow Jones Industrial Average turns positive on January 24, 2022 in New York City. (Photo by Spencer Platt/Getty Images)

In any case, flashes of bearishness may actually be a good thing if recent history is any indication: RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina pointed out that a recent sentiment survey from American Association of Individual Investors showed that bullish sentiment among retail investors reached the lowest since July 2020 and pessimism reached the highest since September 2020.

On August 18, 2020, the S&P closed at a record high for the first time after the pandemic-fueled crash in March 2020, and markets continued rising consistently until the turbulence of early 2022.

"That is something that gives me a lot of comfort," Calvasina said on Yahoo Finance Live (video above), "that even if we haven't seen the downward move play out fully yet, we are still going to make modest gains in this market before the end of the year."

Ethan Wolff-Mann is a Senior Writer and Chief of Staff at Yahoo Finance. When he is reporting, he focuses on investing, consumer issues, and personal finance. Follow him on Twitter @ewolffmann.

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