One unique feature of this bull market has been the increased participation of retail traders. This is notable for a couple of reasons. First, it's unusual that retail traders get involved in markets so close to the lows. Second, retail traders had been largely absent since the dot-com bubble burst in 2000. This was evident from indicators like brokerage trading volumes and inflows.

How We Got Here

Instead, they were piling into fixed-income and passively investing via ETFs. However, this state of affairs dramatically turned last year. In hindsight, it's obvious why this happened. The market's relentless rise over the past decade had engrained the "buy the dip" mentality into the public. Additionally, the government issued stimulus checks to the vast majority of the population.

While this was tremendously helpful for many people, a lot of this money ended up in people's brokerage accounts especially with so many outlets for spending unavailable. Finally, the world was shut down, including sports, so the financial markets replaced sports for a short period of time as a source of entertainment and "action".

As a result, many of the stocks heavily dominated by retail traders soared, and momentum-fueled moves went further than previously imaginable. Some notable groups were cannabis stocks, electric vehicles, and SPACs.

What's Happening Now

However, an interesting thing happened with the latest round of stimulus checks. There was no similar spike in retail trading. Instead, the retail favorites started underperforming. And, now in recent weeks, they have been crashing. This is probably due to the economy reopening and people deciding to spend their stimulus checks rather than invest. Additionally, although the world is far from normal, it's much more normal than it was a year ago as there are more outlets for entertainment and "action". And, it seems that some of them have migrated to crypto trading which makes the stock market seem like a boring place.

In addition to underperformance among stocks dominated by retail traders, there are other indicators that retail traders are losing interest in the market. Call option volumes for single-stocks have plummeted. Robinhood also has dropped in the app store rankings. Contrast this to last year, when it was regularly pinned to the top.

What's Next

For the stock market, this is a healthy development. In essence, we've released some of the froth in the market, while the broad market stayed strong. If these groups kept going higher in defiance of their fundamentals, it would start to pose a larger threat to the market's stability. Now, the market is back to trading on fundamentals like economic data and earnings, and both look constructive in the near and intermediate-term.