After three months of silence, American retail investors are back in the game.

Two weeks ago, when the S&P 500 was about to break through the new high of 2023, the enthusiasm of American retail investors for the stock market was once extinguished:

At that time, Bank of America's client trading volume department announced that retail investors had surrendered (for Bank of America, "retail investors" means high net worth individuals);

And an analysis by Vanda Research, a research institution tracking the trading volume of American retail investors, found that not only the rich joined the ranks of selling, but also the millennial generation with a few hundred dollars of spare money and Robinhood accounts. The enthusiasm for buying stocks has withered, and "retail investors are no longer chasing the rise."

Recently, when the S&P 500 broke through the 3800-4200 point shock range and is about to break through the high point of August 2022, soon, the retail investor sentiment made a 180-degree turn, and they re-entered the stock market in large numbers.

According to Vanda Research's latest report, an average of $1.36 billion flowed into the US market every day in the past week, and retail investors officially returned to the market after three months of silence.

Vanda researcher Marco Iachini said:

"Better-than-expected economic data and the resolution of the debt ceiling are key macro drivers of the rebound in participation rates, but AI is the decisive factor that has boosted animal spirits in recent weeks."

He also pointed out:

"Despite the bearish warnings of a bubble, we still see relatively benign market dynamics, which leads us to believe that the increase in retail buying may continue in the coming weeks, thereby supporting the stock market to rise."

Observing the most active stocks can deepen the understanding of the "retail investor theme" in the past week. The following Vanda scatter plot can better understand the retail investor sentiment in the past week:

First of all, the blue-chip stocks (yellow) with the strongest retail investor buying preferences do not necessarily outperform the market.

However, except for one exception-RIVN (electric vehicle start-up company Rivian), these blue-chip stocks constitute the classic long-term investment portfolio targets of retail investors, such as Apple (AAPL), TLT (iShares Anshao 20-year or more US Treasury Bond ETF), IVV (Anshao Core S&P 500 ETF), T (AT&T) and VZ (Verizon), which indicates that although retail investors are re-engaging in the stock market, they are doing so with a long-term perspective.

Secondly, some top semiconductor companies have experienced some profit-taking (pink), but the buying and selling conditions show a relatively balanced situation.

Thirdly, investors are taking advantage of the rise in bank stocks to liquidate these positions. Finally, some popular small-cap tech companies were among the best-performing stocks of the past week (green), which may help improve the sentiment of retail investors.

Regarding small-cap stocks, it is worth noting that the net purchase ratio of Direxion Daily Small Cap Bear 3X ETF (TZA) and Direxion Daily Small Cap Bull 3X ETF (TNA) as a percentage of total trading volume has increased. It seems that retail investors have divergent views on this area, as both ETFs show significantly more buying than selling. In Vanda's view, this is another sign of market balance rather than a bubble.

Although many retail investors are playing games in the long and short leveraged ETFs of small-cap stocks, some retail investors are pushing the short squeeze of the Russell 2000 index (because investors overall hold short positions in the index futures before last week). Data shows that the weekly inflow of ETFs tracking the Russell 2000 index (IWM) has surged to the highest level since November 2021.

At the same time, even if retail investors are showing renewed interest in small-cap stocks, they are also withdrawing from regional bank stocks at the right time. A good example is the price and trading trend of Truist Financial (TFC), a holding company of Bank of America, last week. As the TFC stock price has recently exceeded the average price since March (about $31.35), the net purchase has become negative, indicating that retail investors are seizing the opportunity to exit these positions and turn to tech stocks and small-cap stocks.

As for some core retail positions, on Monday last week, as Apple held its Worldwide Developers Conference, retail investors created the largest single-day net purchase of the company since December 21, 2021, reaching $190 million.

Given Apple's scale and influence in almost all passive and active funds in the investment field, Vanda does not attach too much significance to the daily retail fund inflows. However, analyzing the daily retail flow in Apple reveals an interesting phenomenon. Buying stocks when retail investors sell them, rather than buying them when they buy stocks at an unprecedented pace, is often more profitable and has a significantly higher success rate (80% vs. 50%). Therefore, be cautious when buying.

Finally, and importantly, Vanda believes that retail buying of AI stocks will continue to increase in the coming weeks. Another indication is that the stock market has not reached worrying levels of retail bubble. Vanda points out that the funds flowing into AI stocks this month have only just exceeded the level of "low" retail purchases typically seen over the past year.