The behavior pattern of US retail investors is undergoing its most significant and concerning shift since 2020. They are no longer entering the market to buy during declines; instead, they are using rebound opportunities to consistently reduce their equity holdings.
According to a recent report from JPMorgan Chase, total retail purchases in the US stock market in March fell by nearly 50% compared to the historical peak in January. While overall retail inflows were decent during a mid-week market rebound last Wednesday, the structure was notably skewed towards fixed-income ETFs rather than equity assets. This indicates that retail risk appetite is continuing to contract and is not recovering in line with the improving market sentiment.
The potential impact of this behavioral change on the market should not be underestimated. Retail investors have historically been a key marginal buyer during US stock market downturns, and their habitual "buy the dip" strategy has provided a natural stabilizing effect. Now, this support is wavering. At the same time, institutional investors have not shown significant signs of entering the market either. The resulting capital vacuum between bulls and bears is increasing market fragility.
A Historic Reversal: "Momentum Crowding" Overtakes "Dip-Buying Crowding"
An analyst from JPMorgan Chase, Arun Jain, stated that retail investors persistently chased momentum strategies from late 2023 onwards. Entering 2024, they began gradually taking profits in long-term winners while seeking opportunities in underperforming assets. Historical patterns show that retail investors typically lean towards buying on dips, concentrating their additional purchases in assets that have lagged over the preceding three months. Since 2020, this "left-tail buying" strategy has, on average, yielded positive returns.
However, a historic reversal in this behavior has recently occurred: the level of crowding in short-term momentum plays by retail investors has, for the first time, surpassed the crowding in lagging assets. This means retail investors currently maintain high exposure to high-beta assets (crowding at the 92.5th percentile, closely aligned with short-term momentum) and are no longer adding to positions in low-volatility assets (the current laggards). Concurrently, retail investors continue to reduce their exposure to cyclical assets.
This fundamental shift in behavior logic signals a move away from their previous role as a market "stabilizer" towards a more defensive, even short-term risk-averse posture. For a US stock market that has relied on retail capital to provide a floor, this represents a structural warning sign that warrants ongoing attention.
Plunge in Purchasing Power: March Data Nearly Halved from January Peak
On a data level, the ebb in overall retail purchasing power in March exceeded expectations. The JPMorgan Chase report indicates that, as of last Tuesday, retail investors maintained a modest net inflow into ETFs, but exhibited a persistent net selling trend in individual stocks, even as the market experienced a rebound during that period. When the market strengthened last Wednesday, the day's overall retail inflow was at the 76.6th percentile, which appeared healthy on the surface but was primarily driven by ETFs (96.4th percentile). More critically, the incremental ETF buying was concentrated in fixed-income ETFs (98th percentile), led by short-duration products like SGOV, rather than risk assets like stocks. For individual stocks, retail investors recorded some inflows during the midday session (64.7th percentile), but then continuously reduced positions in the afternoon, closing the day almost flat (38.1st percentile)—a classic pattern of "selling into strength."
Energy Sector Sees Largest Weekly Net Outflow on Record
At the individual stock level, excluding the "Mag 7" (the seven major tech giants), retail investors were net sellers across almost all sectors in the week ending April 1st, with Consumer Staples being the only exception.
Selling in the Energy sector was particularly intense. Retail investors have been net sellers of energy stocks since February, but the selling intensity increased sharply last week, peaking on Wednesday and resulting in the largest weekly net outflow on record, far exceeding previous historical extremes. ExxonMobil (XOM), Chevron (CVX), and Occidental (OXY) were the primary contributors, with Wednesday z-scores of -6.9, -6.6, and -5.6, respectively.
The memory chip sector also faced pressure. Following Google's announcement of a new compression technology that reduces the memory requirements for AI models, Micron (MU) and SanDisk (SNDK) became the most sold memory stocks for the week, with z-scores of -2.3 and -3.0, respectively. The broader technology sector was not spared either. While retail investors continued buying retail favorites like TSLA, MSFT, and NVDA, they maintained net selling of tech stocks outside the "Mag 7," driving the overall technology sector positioning to its lowest level in nearly six months.
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