Something remarkable is taking place in the markets.

Despite a near record 10 out of 11 weekly drops in the S&P 500 and an unprecedented 11 of 12 weekly declines in the Dow Jones average, retail investors are buying the dip again and again. And not only that, their buying gets more aggressive the lower that stocks slide.

According to the latest EPFR data, investors plowed a whopping $16.6 billion to stocks, all of it passive, with $32.3 billion to ETFs offset by $15.7 billion from mutual funds. This brought the year-to-date ETF inflows to $328 billion vs. $117 billion in long-only outflows.

Last week also saw the sixth consecutive week of inflows into US equities, with a breakdown by style as follows: inflows to US small-cap ($6.6 billion), US value ($5.8 billion), US large-cap ($5.5 billion); with only outflows from US growth ($0.4 billion).

Broken down by sector, there were inflows into tech ($0.8 billion) -- the first in nine weeks -- materials ($0.3 billion), healthcare ($0.3 billion), and utilities ($0.1 billion).

On the other side, there were outflows from communication services ($74 million), consumer ($0.2 billion), energy ($0.3 billion), real estate ($0.5 billion), and financials ($1.6 billion), which has now seen outflows for 12 straight weeks, something which wouldn't happen if markets were expect anything but a stagflation.

Last week also saw the first inflow to emerging markets equities in six weeks ($1.3 billion). As well, last week saw the largest inflow to US small-caps since December 2021 ($6.6 billion), and the largest inflow to US value in 13 weeks ($5.8 billion). Meanwhile, capital flight continued in Japan, with the country seeing outflows over the past four weeks ($1.1 billion), and Europe seeing seen non-stop outflows for the past 18 weeks ($1.0 billion).

Meanwhile, as US equity inflows prove remarkably resilient, the same cannot be said for credit, which just suffered the largest outflows since March 2020 from junk bonds ($7.8 billion), bank loans ($2.1 billion), and munis ($4.9 billion).

In fact, as BofA's Michael Hartnett calculates, for every $100 of inflow since January 2020, there has been $35 of outflow from IG + HY + EM debt vs. $0 from equities.

This suggests that the capitulation has been in credit and cryptocurrency.

Yet, this capitulation has not been seen in stocks, which is why Hartnett is worried that equity lows are still not in.

The latest analysis from Vanda Research confirms that far from capitulating, retail investors continue to pile in with little signs of waning retail enthusiasm. VandaTrack data showed a robust buy-the-dip activity by retail investors last Monday as markets tumbled into a bear market, with the total net inflow reaching +$1.8 billion on the day.

That said, the aggregate net buying appears predominantly driven by investors with a long-term investment horizon that are willing to continue dollar-cost-averaging into a sliding stock market. Even so, Vanda believes that there must be a pain threshold for short-term losses – albeit it is proving more elusive than we initially thought.

Meanwhile, the impressive retail flow in the cash market has yet to show signs of capitulation, although as Vanda cautions, retail sentiment can change quickly, especially towards the last innings of a sell-off when the bottom usually sets in.

And while we wait, here are some more statistics. First, the drawdown of the average retail portfolio is now -34%, which is larger than in any other recent sell-off episode, including March 2020.

One difference between now and prior sell-offs lies in the speed of the drawdown. During March 2020, for instance, the S&P 500 dropped by 30% in just over a month, while the current drawdown is in its sixth month (and counting). This slow-burn slide has two implications:

1. Retail investors may take longer to run out of capital to invest as they keep collecting paychecks (assuming the labor situation remains stable).
2. Losses are less “traumatic” as investors usually suffer from “short memory” bias.

All told, these two factors, plus the expectation that the Fed will capitulate soon enough, contribute to retail’s resilience for now.

Outside the cash market, options flows still point to overall weakening sentiment as investors traded more put than call options in recent days (which is also one of the reasons selling pressure has been muted since so many are hedged). The difference in call-put premium traded by retail investors was relatively small, at -$55 million on Monday.

According to Vanda, those in the retail community engaging in the options market are primarily hedging themselves for any further downside via put options in exchange-traded funds (SPY, QQQ, HYG, etc.). However, the total option imbalance was mainly driven by institutional investors buying protection.

Despite continued buying pressure, there are days when selling overtakes demand. Case in point, the lack of retail demand likely amplified the large sell-off at the market open on Monday, as most of the retail inflows into US equities were concentrated towards the end of the day. 

The sizable net inflow at the close was still insufficient to drive a tactical rebound – unlike the prior instance. However resilient retail investors have been this year, they could not overpower the institutional investor selling pressure following headlines of a possible 75 bps FOMC hike this week.

Another potential warning sign: the breadth of retail purchases is deteriorating again, though it is not flashing any red flags. The total number of US securities (ETFs and single stocks) bought vs. those sold is decreasing. This is a sign of narrowing market breadth due to retail investors directing their capital towards a more concentrated basket of assets.

As a historical aside, the two weeks before any retail capitulations had witnessed approximately five days of negative breadth and the number of securities net-sold being -250 or less, on average. We’re not there just yet.

Adding to the confusion, another of Vanda's favorite capitulation indicators is actually showing improvement signs: in a reversal of the trend from the past month, purchases of single stocks relative to ETFs have picked up again. In the past, when the going got rough, retail investors tended to rotate away from single stock purchases and direct capital towards broad ETFs.

This behavior tended to coincide with weak market periods where conviction in stock-picking abilities dwindled, and retail investors found refuge in more diversified instruments. Only when net selling in single stocks and ETFs concurrently happened did market bottoms form. As the chart below shows, using a one-month rolling sum, we note that retail net flows sit well above prior key capitulation levels for both instruments.

One final sentiment indicator to track is retail participation in cryptocurrency where, once contrary to expectations, retail keeps piling in and providing exit liquidity to institutional investors dumping crypto proxy names.

With BTC and ETH tumbling below $20,000 and $1,000, respectively, it is no surprise that publicly listed crypto-related companies are also experiencing selling pressure. However, the VandaTrack data shows that retail crowds are taking this opportunity to buy into crypto-related stocks and ETFs to the tune of $570 million over the past 10 trading days – a pace not seen since January 2021.

There are currently a lot of moving parts in crypto land, with the latest panic selling likely triggered by several big protocols and funds (Celsius/3AC) gating and blocking user redemptions or simply liquidating.

But why does this matter? Well, we have recently highlighted how older cohorts of the retail community have started reducing exposure to riskier assets while younger and more speculative investors continue to hang on. Monitoring activity around crypto-related plays can give us early signs of capitulation as this is a highly speculative area of the markets.