One thing is certain, the current coronavirus stock market rally has seen immense participation by retail investors. In fact, it would not be an exaggeration to say that retail investors have brought some mammoth moves into some of the stocks. Their stock trading strategy broke every single investment rule. Without their support, the stock crash would have been a whole different story.
Are Stocks Going Up or Down?
The Dow Index is up 50% from its Covid-19 crash, and the Dow price has crossed above its 100-week average price. The S&P 500 index, which is a better representation of the overall stock market, is also up 52% from its coronavirus stock market low. The S&P 500 index is trading nearly ten percent higher than its 100-week average price—this confirms that traders are not only buying stocks but are comfortable holding their long positions.
Why did retail investors flock to the stock market?
- Retail investors have spent a lot of time sitting at home because of coronavirus lockdown. They used their free time in investing stock market.
- Low brokerage cost: the term Robinhood traders became popular because retail investors had the opportunity to participate in the market with virtually zero commissions.
- The stock market crash during the coronavirus pandemic period triggered one of the fastest declines in the stock market. Retail investors saw the opportunity, and they cashed on this stock market crash in what is known as ‘buying the dip’.
- The 2007 financial crisis gave retail traders some sort of trading blueprint concerning companies that were on the brink of bankruptcy or had already filed for bankruptcy. Retail traders had the belief that governments would not allow a repeat of the 2007 financial crisis, and that a bailout would happen. They were right to a large extent as many companies were bailed out, not just in the U.S., but also in the U.K and Europe as well.
- The coronavirus vaccine news made many stocks trade like cryptos. Some of them increased in value by more than ten times, and the gains that they produced were something that attracted the retail crowd. After all, the entire crypto market was mainly popular because of Bitcoin’s price and its hype.
What About Smart Money?
Institutional money, on the other hand, has been calibrating the move very carefully. The consensus among the smart money is that the current stock rally is based on hype, a bubble that will no doubt pop.