After aggressively buying in April, retail investors shifted to partial profit-taking in May, increasing bets on fixed-income ETFs and returning to the options market. They favored the healthcare and energy sectors, with small-cap stocks and AI becoming new darlings. On the individual stock front, they aggressively bottom-fished Tesla while continuing to sell Nvidia.

In May, retail investors once again played a leading role, taking advantage of low market liquidity to drive price movements and fuel waves of rallies.

The latest report from JPMorgan shows that retail investors net bought $23 billion in May, down about $17 billion from March and April but still roughly in line with the annual average of $25 billion, comparable to the retail frenzy of 2021.

In stark contrast to previous months, retail investors only had three days in May with net buys exceeding the $2 billion threshold, while there were four net selling days, mainly concentrated in the last two weeks. Sentiment indicators once dropped to a low of -0.7.

Meanwhile, retail investors' returns in May recorded a 4.9% gain, slightly below the overall market's 6.1% performance. Year-to-date, their portfolios are down 2.6%, while the S&P 500 has risen 1.8%.

Tesla Remains The Favorite, Nvidia Selloff Continues

Over the past week, retail traders net bought $6.8 billion, 0.4 standard deviations above the one-year average.

ETFs contributed $4 billion in net inflows, with increased demand for fixed-income ETFs, led by money market and ultra-short-term ETFs like SGOV (up 2 standard deviations), while interest in GLD and IBIT remained elevated at 0.5 standard deviations.

In individual stocks, retail investors aggressively bought $4.4 billion worth of Tesla, coinciding with an 8% drop in the stock. Notably, May 30 marked the largest single-day net buy in two months. On the other hand, Nvidia continued to lead outflows, with $2.2 billion in net selling, marking its longest streak of 17 consecutive selling days since 2018.

At the sector level, materials and financials saw outflows of 1.4 and 1.0 standard deviations, respectively, while healthcare and energy enjoyed excess demand of 1.5 and 1.1 standard deviations.

Retail Bets on Small Caps and AI Secondaries

The report noted that retail investors entered "rotation mode" in May, shifting from locking in profits in core holdings (like Nvidia and the "Magnificent Seven") to higher-risk corners of the market.

Small-cap stocks (e.g., IWM ETF) and AI-related secondary themes (e.g., data centers, quantum computing, nuclear energy) became new favorites. Vanda warned that while such behavior is not uncommon, it reflects a complacency that may not align with macro risks, potentially signaling the "final innings" of the current stock market rally.

JPMorgan cautioned that while this behavior is not unusual, it "hints at a complacency that may not match the lingering macro risks, thus reinforcing our view that the current stock rally is in its late stages."

Within small caps, data centers, quantum computing, and nuclear/power-related stocks are benefiting from the retail rotation. The firm noted that when retail flows start drying up, it's usually time to worry about the sustainability of these stocks' gains.

Sentiment data from social media platforms like Reddit and WallStreetBets also reflects this trend.

Over the past month, the most active stocks included mega-cap tech (NVDA, TSLA, AVGO, PLTR), meme stocks (GME, HOOD, HIMS), and AI/data center newcomers (CRWV).

Positive sentiment centered on recent high-momentum or AI-themed stocks, while negative sentiment surrounded underperformers or controversial names (e.g., DJT, GLD, RKLB, META, BA, UNH, MRVL).

Options Market Surge, Retail Share Rises to 18%

Retail investors are not only active in the spot market but also increasing their presence in options, with their market share rebounding to 18%.

Over the past week, retail investors sold $4.1 billion in Delta and $23 billion in Gamma, marking the largest Gamma imbalance since mid-February. S&P 500 options contributed $18 billion of the Gamma imbalance, while Nasdaq options accounted for $3 billion, with balanced call/put trading volumes.

This shows that while retail investors are using options to amplify leverage and hedge risks, they are also injecting additional uncertainty into market volatility.