Retail Investors still pessimistic despite buying $1.5 billion in single stocks last week

Retail trading activity surged alongside the tech stock rally, but where are investors remaining defensive? IG North America CEO JJ Kinahan joins Yahoo Finance Live to break down retail investor sentiments relating to the tech and financial sectors, overall market outlook, and future Fed rate hikes.

Video transcript

JULIE HYMAN: Retail investors are heading into the market in full force. Last week saw non-professional investors pour a record $1 and 1/2 billion into stocks. The majority of single stock inflow was into S&P darling's Tesla, Apple, and Nvidia. That's according to data compiled by JPMorgan. But did retail join the YOLO rally too late? In the past week, Nvidia shares for example, have steadily declined, down almost 5%.

With more on the state of retail traders, we're joined by JJ Kinahan, IG North America CEO. Hey JJ, good to see you. You know, timing the market is hard, as we all know. But it is interesting to see this retail enthusiasm. What do you make of it? And do you think it's a sign that things are going to turn further?

JJ KINAHAN: Well, Julia, I look at our clients' behaviors, and what's really interesting to me is that this has been a year that's been very largely defined by actually retail traders buying more ETFs that are index-related. What do I mean by that? Spiders, QQQ, to a lesser extent, IWM representing S&P 500, NASDAQ, and Russell.

And so it's been interesting over the last three weeks is we've definitely started to see more single stock play than we had seen for most of the year. And as you just said, Tesla has become the number one darling of retail traders, and that's a change from the last couple of years. It was all about Apple and Microsoft. Right now, it's more about Tesla and Nvidia with Apple being the third wheel.

So what we saw at our clients is the last three weeks, they have been very heavily been buying Tesla. But it was really interesting that about last Thursday, we saw a little bit of a change in their behavior. And the change we saw in their behavior was more clients who would buy Tesla, doing so also with some put options as protection.

Or we saw them doing more short-term trading so that they weren't carrying this longer term position in Tesla. I thought that was really interesting. Nvidia on the drop. I think more people perhaps are attracted to it for a longer term because those that were buying Nvidia were not doing so for shorter term trading. And Apple when people buy it, they do tend to hold it for a longer term.

It's a stock you actually see a lot of clients hold and then sell upside calls against so that they can collect that premium if it doesn't go up enough or they'll get a call the way at a price that they're comfortable with. So I think that the behavior pattern has really been interesting over particularly the last three weeks, and particularly around the Tesla name, which had, as you just said, such an incredible move over the last few weeks.

BRAD SMITH: But does that behavior pattern scream to you that the valuations are substantiated right now as retail traders are evaluating some of the largest FOMO trades that you're laying out in front of us?

JJ KINAHAN: You know, Brad, it's always interesting in terms of the fact that we tend to find these favorites of retail over the last few years when they have these downward pockets have been able to recover. I'm not saying, of course, that they're going to recover. And I think that this is the first time we've seen a desire to go to some of the single names from--

Let me explain what I mean by that. And the fact that, as I said, we've seen a lot of ETF-related trading and people adding to those positions. They have not been aggressive about adding to single name positions. This is the first time we're starting to see some of that behavior over the last, as I said, about three weeks. So the NVIDIA one is one that as the stock has come off 5%, maybe you're seeing a little bit more of that type of behavior.

But as I said, with Tesla, I'm seeing people being more selective on where they buy it. And Apple just tends to be a bit of a retail favorite. So I guess breaking that question down to the three you just asked me about, Nvidia would be the one that I would actually worry the most about perhaps being overpriced or whatever you want to say or having a multiple that's too high based on this type of behavior.

JULIE HYMAN: There's a lot of discussion about that we need broadening of the rally. Are you seeing any signs of retail buying beyond some of these concentrated names?

JJ KINAHAN: Unfortunately not enough, if you will, in order for us to continue the rally. The technology names, you could probably throw a Microsoft in there and a couple of others that people are buying, but we're not seeing that buy particularly across financials. And that's the area where I really think you need to see us see the buying in order for this to continue.

Because financials not only help the S&P 500, as everybody watching program, sure knows. But I think one of the overlooked things about buying financials is that being the number two sector within Russell helps to lift that index also. We're seeing the outperformance of the NASDAQ this year. S&P 500 has obviously done pretty well over the last couple of weeks.

But if we're going to say, OK, we really want to see a springboard into the end of the year, we're going to need the financials to perform. And the fact is, with-- you guys talk about the yield curve all day long on here. And with the two-year still being above the 30-year, it's not giving the financials the sort of springboard they need to get higher.

And because of that, you're seeing people nibble around the edges every time we have a rally where they start to buy some of the bigger banks, the Bank of America, JP Morgan, Citigroup, Goldman. But they're not really committing to that. And I think that that's been the biggest thing that one of the reasons we can actually probably continue higher overall is I think in the market overall and particularly with retail, we're not seeing people convinced to really commit to names in a big way.

It's slower adding to their portfolios. Where you get into a lot of trouble is when people have the true FOMO, they have to be in. We're not seeing that behavior. And I actually think that's a positive for the market overall is that people, they were dipping their toe in the water. Now maybe they're up to the top of their calf. We're not seeing that diving headlong in. And overall, that tends to be a positive.

BRAD SMITH: Yeah. A question of whether it's some of the kind of East Coast not clear water or some of the clearer waters of Europe or other parts of the world because the international trade is one that retail investors have had to keep their eye on, given some of the projections for where consumer spending would reemerge, where economies would continue to scale up. And more largely, there is this question of whether or not retail investors are impressed by the international equation. Is there anything in terms of flows that you've seen there that points one way or the other?

JJ KINAHAN: Well, I think the ones to keep our eye on there are going to be those Chinese ADRs, particularly with the announcement yesterday out of China that they are putting more money, some stimulus, and have committed to growth. And so the Babas, jd.com has got a little bit of a bump yesterday. We'll see if that can continue and we get some life out of the Chinese stocks, which have done OK, but haven't really rocketed anything spectacularly.

I think as we look across the-- that would be great to see the Chinese stocks performing well. And I think that will give a bigger lift, of course, to the tech stocks. It'll be interesting to see what that would mean for retail overall and if that could breathe some life into the retail market overall. Or I should say into retail stocks overall.

And then I think as we look across the rest of Europe, et cetera, you're still seeing those very high inflation rates. We saw last week the Bank of England decide to raise rates again. So it becomes a matter of now what happens with rates. The central banks still are the subject. You know, again, as I don't have to tell you guys talking about this a lot throughout the day with a lot of folks, they are the primary focus of what everybody's doing right now.

We've seen the probabilities. Many were expecting a rate cut by the end of the year. I think what we're seeing right now is that probability has been taken away pretty significantly. In fact, if we look out to the December time frame in meeting, there's only a 5% probability as of right before the opening this morning that there would be a rate cut. Yet there's a 67% probability that there would be a rate hike.

We know going into the next meeting that it's almost a 77% probability of a rate hike going to the July meeting. So again, I think many of those folks who were expecting the rate cut to be a stimulus, that is sort of going away. So we're going to have to look elsewhere for stimuli. And what we're seeing right now in the VIX through July 4 is there doesn't seem to be a lot on the plate to disrupt it. So seeing things like consumer confidence this morning, et cetera, can perhaps give us some positive stimulus going into the month of July.

JULIE HYMAN: We'll see. JJ, good to catch up with you as always.

JJ KINAHAN: Always great to see.

JULIE HYMAN: JJ Kinahan, IG North America CEO. Thank you.