Retail investor sentiment is ‘a matter of valuation,’ TD Ameritrade strategist says

TD Ameritrade Head Trading Strategist Shawn Cruz joins Yahoo Finance Live to discuss volatility, IMX score dip, client buys and sells, and the outlook for investor uncertainty.

Video transcript

AKIKO FUJITA: A new research out from TD Ameritrade, its monthly investment mover index, pointing to a cool down among retail investors last month with clients net sellers of equities for the first time since December of last year. Let's bring in Shawn Cruz, who is the head of a trading strategy for TD Ameritrade.

Shawn, it's good to talk to you today. You know, no surprise when we look back to May, that was certainly a volatile month. It's not just retail investors who are selling into the market. But what stood out to you in the data that you got?

SHAWN CRUZ: Yeah, so, this one was a little bit of a sea change in terms of what we had seen out of this report. So, we track one component, this actually tracks sort of the extent that they are stepping out in the risk curve, or if they're going to a little bit more of a defensive type of posture in terms of what they're buying. And we've seen them start getting a little bit more defensive in their buying behaviors, which was pulling the IMX lower. But they were still net buyers of equities, which can seem kind of confusing, but it just really means that they are being a little bit more defensive when they're deploying their capital.

This is the first time since December where they were actually net sellers of equities. So, they've been using a lot of this pullback as an opportunity to go out there and accumulate some mains, and they still did that in some very specific areas. But by and large, they were just sellers of equities. And I think it makes sense when you think of everything we heard from anybody reporting earnings over the month, was it going to instill much confidence.

BRIAN CHEUNG: Hey, Shawn, Brian Cheung here. And this is a really fascinating report from the perspective that it gives you a lens into kind of where the retail appetite is. But just because sentiment went down and that most of them were net sellers doesn't mean that people didn't buy certain stocks. What stocks do you see people buying despite that volatility? And what did you also see people actively selling in more noticeable volume than perhaps others?

SHAWN CRUZ: Yeah, it was interesting that what they were buying, there really wasn't much spared in terms of what they were going out and selling. But some of the names that were buying were just some of the more, I'd say, familiar core type of big tech names or big consumer discretionary names that had some significant weakness. They actually used that as a buying opportunity.

Amazon is one of them, one of the names that was out there. Tesla, when they were getting their pretty sharp pullback, they're out there buying Tesla. We also say them buy Apple. So, just those popular names, there are names that are a bit more established, there are names that don't have as much uncertainty around future cash flow or profitability. Those are the names they moved into.

As far as what they sold, I think there was a little bit of a rotation that was consistent with what we've seen in previous months. Names that were relatively strong, or at least a little bit more resilient to some of that selling pressure, those are the names they sold. And I think they use the profits or just the cash generated from that sell to go back and put it back to work in some of those beat up names.

So, some of the names we saw were for names like Exxon, which has been able to tread water here as crude oil is maintained somewhat elevated. Other [INAUDIBLE] names, those are sort of the names that we actually saw them going out there and selling over the month.

AKIKO FUJITA: Shawn, those names you just highlighted of what clients bought is an interesting one for me because we've spoken to you about the study in the past. I mean, these are names that even in good times, retail investors are buying into. And sure, you could argue that there's not necessarily questions about cash flow in some of these bigger tech names, but there is a question about how much growth can continue at the rate it has been when you look at the big tech names.

And I wonder what you think that says about retail investor sentiment. I mean, yes, they went in and bought on the dip, some could argue, but these are still the same names they would have bought even before this volatility.

SHAWN CRUZ: Yeah, I think it's really a matter of valuation of how much you're paying for whatever that growth may be. That is the key differentiator. And when you look at some of the prices of these companies did over the time period, the valuations got-- they got hit pretty hard across the board for-- certainly for a lot of these tech names, but a lot of other cyclical type of names as well.

I always like the point at JP Morgan, where it goes from 170 down to 115. And if you told me JP Morgan is going to have a shock to the stock price that fast, I would tell you that means there is significant distress out there in the market. But it's really just a lot of these names, the valuations, the multiples came in, and that's for clients who decided to go out there and try to step in and scoop up some of these names on that weakness.

I think one thing too is, a lot of the uncertainty and a lot of things that I think we're looking at for these companies is really they're discussing this year and next year. But when you think about maybe a longer term investor, some of these other pretty [INAUDIBLE], they're looking beyond however long this inflation and a lot of the other global overhangs are having, however long that lasts, they're looking at the prospects for the companies well beyond that.

So, you're willing to write out some of the volatility that will certainly continue. As we get more information coming in the market, the market has more to price in, and you're going to look past that, and you can make it pretty solid case for going in and buying things like Amazon, Apple, some of the chip makers in-- in this, like, the backdrop.

BRIAN CHEUNG: Shawn, we've been talking about stocks, but what about things that are not stocks, like, for example, fixed income? You noted that a lot of buyers were-- a lot of strong buying in that fixed income space. And then kind of in a tangentially related type of category, are you seeing people really get involved with puts and calls, options, trading, despite that volatility? Maybe try to play the falling knife, if you will?

SHAWN CRUZ: Yeah. So, on the fixed income front, we did see actually some pretty significant demand there. That was more in the Treasury space. And if you look at really how high the 10-year yield got over the time period, I think it makes sense that if you're looking at all the uncertainty and all the volatility going on in the equity space, and you're starting to see yields climb to the levels they were at, the levels that we hadn't seen for quite a while, I think some investors were OK just going in saying, hey, I'll take that 3% or I'll come down on the curve and cut down on duration, and maybe find some shorter dated opportunities in the Treasury markets.

I think that made sense and it's not shocking, like I said, given all the uncertainty. And it didn't matter if you were looking at the geopolitical level, if you were looking at what was going on with COVID, if you were looking at what we were hearing from some these management teams and companies, there's a lot of negativity out there. So, I think the-- the safe haven or sort of the place you go to put money on the sidelines and maybe try and help them settle out treasuries and some other quality fixed income type assets makes sense.

On the options front, you've actually seen just you look at the industry level, [INAUDIBLE] speak to company specific volumes or I'll be on the phone with legal as soon as I'm off here, but we've seen it across the industry at the industry level a pretty decent pullback in option activity, and that has also come alongside a lot of deleveraging. [INAUDIBLE] actually puts out a margin report where they show how much margin borrowing is going on out there. That number is coming out as well.

So, I do think this is a bit more of a retrenching. There's deleveraging going on. And that's also maybe taking away some of that speculative type of behavior you would see out of the option space, but there's probably still people out there that are using it as a hedging vehicle to help put some of that volatility out of their portfolio as we make our way through this time period.

BRIAN CHEUNG: Perhaps a little bit of a repositioning in the meantime. Shawn Cruz, head trading strategist for TD Ameritrade. Thanks so much for stopping by this Monday. Appreciate it.