Individual investors push stocks to record high before Christmas, providing opportunity for Wall Street to sell

The S&P 500 futures dropped by 0.22% this morning, indicating that some traders opted to secure their profits after the index reached a new all-time high of 6,901 during yesterday's close. This peak was largely expected, as U.S. Federal Reserve Chair Jerome Powell had previously signaled an interest rate cut of 0.25% on Wednesday, injecting more liquidity into the market.

Nasdaq 100 futures also fell by 0.51% in premarket trading, as investors assessed winners and losers in the technology sector. Oracle, for instance, dropped another 1% overnight, extending its decline of over 9% in the past week after posting disappointing revenue figures and higher-than-expected capital expenditure. In contrast, Alphabet (Google) saw a 0.26% increase in overnight trading.

Overall, the S&P 500 has gained 17.33% so far this year, with Jerome Powell's signaling of 175 basis points in rate cuts since last year acting as the catalyst. However, a significant portion of the market's rally has been fueled by retail investorsindividual investors rather than institutional playerswho have been actively buying into exchange-traded funds (ETFs) and individual tech stocks, as noted by Arun Jain and his colleagues at JPMorgan.

In the week leading up to December 10, retail investors injected $7.8 billion into the stock market, surpassing the $6.3 billion weekly average. According to JPMorgans report, "Retail investors continued to favor ETFs (+$6.3B) over individual stocks (+$1.5B)." They also forecast that 2025 is on track to be a record-breaking year for retail investors, with inflows set to be nearly 90% higher than the previous year and 14% above the peak observed during the 2021 retail frenzy.

Retail investors appear to have profited handsomely in 2023, as they capitalized on market dips, such as the 38% gain from the April low to yesterday's record. They also favored ETFs and gold (which has surged 65% year to date), according to JPMorgan. Retail trading volume has doubled since 2010, and individual investors are now more active than mutual funds and hedge funds, as reported by the Financial Times.

Despite their success, retail investors' enthusiasm for riskier assets is starting to raise concerns on Wall Street. The Bank for International Settlements (BIS), which acts as a bank for central banks, recently published a report stating that retail traders are now seen as the "dumb money" in the market. According to the BIS, "Retail investors continued to pour money into U.S. equity funds, even as institutional investors gradually withdrew." The surge in investments might reflect an eagerness to take advantage of market momentum, even if it involves elevated risk-taking.

Michael Hartnett and his team at Bank of America have interpreted these market dynamics as a sell signal. Their "Bull & Bear Indicator," which gauges investor sentiment based on technical data such as fund flows, has now reached 7.8, just shy of the "extreme bullishness" level, which typically suggests it might be time for investors to cash out.

Here's a quick snapshot of global markets ahead of the New York open:

• S&P 500 futures: down 0.22% after hitting a new record high of 6,901 in the last session.
• STOXX Europe 600: up 0.37% in early trading.
• U.K. FTSE 100: up 0.38%.
• Japan Nikkei 225: up 1.37%.
• China CSI 300: up 0.63%.
• South Korea KOSPI: up 1.38%.
• India Nifty 50: up 0.51%.
• Bitcoin: rose to $92,000.

Sources:

• Retail investors drive stocks to a pre-Christmas all-time high—and Wall Street sees a moment to sell