Retail Trading Explosion
Let’s discuss the spike in retail trading activity. It is one of the hottest topics on Wall Street/financial Twitter and because I have a variant opinion. As you can see from the chart below, the combined E-Trade and TD Ameritrade DARTs, which is daily average revenue traders, has gone vertical.
A great example of this trend is Dave Portnoy. He’s the founder of Barstool Sports which recently was partially acquired by Penn National gaming. He’s a sports analyst who does other social media videos. He has suddenly become a day trader because he’s bored and because he needs to generate content.
Many men have switched from following sports to stocks. Many wonder what will happen when sports come back. Do they dump their shares or keep owning them, but trade positions much less? Personally, I’m not willing to wait and see which is why I try to avoid stocks with high retail ownership. You can look up how many Robinhood accounts own specific stocks. And I don’t want to play where they are playing because they can force stocks to go way against the fundamentals.
That’s one reason many won’t buy oil tankers. Besides the fact that these stocks have been in a downtrend for years, we don’t like that so many retail traders are being sold these names. They have a cult-like following even though it’s a very boring business. It’s like Tesla except for shipping nerds.
While many will avoid highly traded retail stocks, we’re not selling equities because there have been thousands of new retail accounts. There has been a spike in activity because sports betting doesn’t exist. A lot of these accounts only have a few thousand dollars in them. This is all noise and no much of a signal.
Big Fat Finger
Jobless claims report was a big embarrassment. Traders and algos use this number to make investment decisions. It’s a huge flaw in the system that a data entry mistake in Connecticut altered the number of initial claims. Someone should have realized that the number of claims wasn’t that high in Connecticut. There were 29,800 initial claims in Connecticut, but the report showed 298,700. That’s a 10 fold mistake. They should do better.
The fact that initial claims didn’t fall 195,000 to 2.981 million and in fact were near 2.6 million is a huge deal in my analysis. Claims had been falling for 5 weeks straight by an average amount of 740,000. It would have been very bad to see a 195,000 decline in initial claims. Reality is the decline was close to 600,000. The red line in the chart above shows the big shift in the rate of the decline.
Now with the red dot being the right number, the trend of lower initial claims lives on. It’s time to expect a small increase in unemployment after the May reading. Unemployment rate this summer shouldn’t be much higher than in May. It could even be lower. Many predict by July there will be readings below 1 million initial weekly claims. That’s a bold prediction, but the data will accelerate to the downside as all the backlogs are worked through and the states reopen.
Continued claims reading actually wasn’t bad. There only was a 456,000 increase in continued claims in the week of May 2nd. Imagine with the revised initial claims report how much better the continued claims report will be next week on a rate of change basis. This increase in the week of May 2nd was the smallest since March 14th.
There had been a 4.366 million increase in the last week of April. When continued claims start falling, it means the recession is over. Since this is jumpy data, I won’t make a near term prediction on the change in continued claims. We will be watching it carefully in the next few weeks.
Huge Decline In Consumer Comfort
Bloomberg Consumer Comfort index is looking very good. That sounds weird because the chart below shows a straight line lower. It looks good because it’s nearing the last recessions’ bottom and it’s falling a lower rate. Specifically, the index only fell 1.1 points in the week of May 10th which was the smallest decline in 2 months. This is the lowest reading since September 2014.
It’s surprising confidence is as high as it was in 2014 since the unemployment rate is way higher now. You would think consumers would be less confident, but it looks like consumers are getting excited about the reopenings. Specifically, the index has fallen 31.5 points from its 20 year high in January. It’s only 12.8 points above the record low of 23 in the last recession. How can one not be bullish when most of the decline has happened already? It can’t get much worse.
Sentiment on the economy has fallen in every week since January. The index’s measurement of personal finances and buying conditions only fell marginally. That’s probably because consumers are saving more and are getting fiscal stimulus checks. There should be more deals especially in autos because of the decline in demand.
In the April CPI report there was a decline in prices for new and used vehicles. It wouldn’t be surprising if that decline worsened in May based on the 34.3% decline in used car sales in April. Used car prices fell 11.41% in April compared to March.
Many investors won’t be selling stocks because people are bored and trading from home. We look at valuations and fundamentals. The only shift I will make is to avoid stocks retail traders love.
Connecticut made a huge mistake in the number of initial claims. National initial weekly claims fell like they did in the prior 5 weeks. Consumer sentiment barely fell in the week of May 10th. The index is close to its bottom which is bullish. It might bottom in June.
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