Castle Securities: Retail Investor Sentiment Cools; Historical Patterns Suggest a Short-Term Rebound in U.S. Markets

Golden Finance reported that on April 8, a Castle Securities strategist said retail investor sentiment has cooled, which may signal that the U.S. stock market could rebound in the short term. Scott Rubner, head of stock and stock derivatives strategy at Castle Securities, said that based on data from the company’s platform, last week individual traders turned into net sellers of U.S. stocks and options. Traditionally, retail investors have been one of the most bullish groups in the stock market. Since January 2020, this has only happened 18 times. In the weeks prior, the Iran war and a surge in oil prices triggered sharp market volatility. In a report to clients on Tuesday, Rubner wrote: “What we’re seeing now is that retail investors are beginning to show initial signs of capitulation in both the spot and options markets, and retail participation is no longer a one-way demand source.” This shift toward bearishness is clearly at odds with the behavior pattern of retail investors consistently buying the dips in recent years. But according to Castle Securities data, historically, periods when retail investors appear to be tiring tend to coincide with stronger short-term returns in U.S. stocks: in the two months following the appearance of similar signals, the S&P 500 Index has about an 82% probability of rising, with an average gain of 4.1%.