Small-fry investors are still screwing up the courage to buy every dip. Yet their success as a self-fulfilling force is dissipating due to the influence of big money managers who are cutting risk at every opportunity.

The do-it-yourself crowd bought a net US$2.7 billion of stocks in the week through Tuesday, roughly in line with the one-year average, according JPMorgan Chase & Co. strategist Peng Cheng, who derived the estimate from public data on exchanges.

But while still a visible presence, retail traders’ share of trading volume is declining and their ability to move markets is being offset by increasingly bearish institutional investors taking cues from the Federal Reserve.

The clash between Main Street and Wall Street is on display in Bank of America Corp.’s client flows. While individual investors joined corporate America in snapping up stocks during last week’s equity rout, adding US$37 million to stocks, hedge funds and institutional investors pulled out US$2.7 billion, according to the firm’s strategists including Jill Carey Hal.

“Retail investors have the potential to ‘will’ the market higher,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “But in this environment I think most will look for confirming support from the institutional side.” 

All the optimism may eventually pay off. But for now, bears are having the upper hand. The S&P 500 is poised for its third straight weekly decline, the longest losing run since June. A two-month rally since mid-June has fizzled, and the index is down 17 per cent for the year.  

Outside meme stocks, retail’s impact on the broad market is waning. Their trading made up 17.5 per cent of the overall volumes in the second quarter, down from a peak of 24 per cent in the first quarter of 2021 as they piled into the post-pandemic market rally, according to estimates by Bloomberg Intelligence analysts Jackson Gutenplan and Larry Tabb.

The drop in part reflects institutional investors shuffling holdings to adjust to the new Fed regime. It also coincided with a reversal of fate in the once-successful strategy of buying the dip. Gains that newbie traders relied on are evaporating. As of mid-June, all their trading profits made during the meme-stock era had been wiped out, JPMorgan estimated.

“Their overall buying impulse has declined compared to last year and stayed below the long-term average since April,” JPMorgan’s Cheng said. “So they are offering less support to the market.” 

It’s a departure from the previous two years, when small-time day traders piled into the post-pandemic market rally in record amounts. Last year, they banded together to force a squeeze on hedge funds. 

Signs of trepidation are surfacing. The most explicit evidence is in faddish stocks themselves, which have come back to earth as fast as they soared over the summer. A rough proxy for the group, the Roundhill MEME ETF, which jumped 27 per cent over three weeks through mid-August, has now given all the gains back.

A week ago, when Fed Chair Jerome Powell’s clear and stern message on monetary tightening sent stocks reeling, the retail army didn’t step in to buy the dip until the end of the trading session, according to Vanda Research analysts including Marco Iachini and Giacomo Pierantoni. 

“Retail investors are less willing to buy intraday dips aggressively –- the challenging market environment is forcing them to be more cautious,” the analysts wrote in a note. “If the S&P 500 continues to fall sharply, we expect retail investors to decrease their equity purchases further, as happened in late April.”