Retail Investors Are Buying Every Dip — A Warning Sign for the Market
Retail investors have been aggressively “buying the dip” — a behavior that often signals a market top rather than a bottom. Remember Warren Buffett’s famous advice: “Be fearful when others are greedy.”
Following the S&P 500’s sharp decline in early April — a drop of over 12% in just four sessions — individual investors rushed in to scoop up stocks. As MarketWatch’s Joseph Adinolfi noted, “An army of amateur investors stepped up to buy the dip with both hands.” In fact, April saw one of the most aggressive waves of retail buying in recent memory.
That enthusiasm may not be good news. Historically, widespread dip-buying by retail investors has marked market peaks. In contrast, reluctance to buy after declines tends to appear near market bottoms.
Consider Yale professor Robert Shiller’s “Buy on Dips Confidence Index,” which measures retail sentiment based on how investors expect the market to react after a one-day drop. The index has shown a strong inverse relationship with future stock performance: higher confidence readings are often followed by weaker returns, and vice versa. These results are statistically significant.
While the index is published with a lag, current behavior suggests it’s likely near the top of its historical range. Supporting this view, Adinolfi reported that between April 8 and the end of the month, retail investors poured an estimated $50 billion into stocks — at times making up nearly a third of total daily trading volume, according to JPMorgan analysts.
Contrarian investors view this as a red flag. Market bottoms typically occur when retail investors sell into strength, reducing their exposure on every uptick. That fearful behavior is nowhere to be found right now. In fact, each successful dip-buy only reinforces their confidence, making them even more committed to the strategy.
This growing stubbornness among retail investors could mean that only a more severe and sustained downturn will be enough to reset sentiment and lay the foundation for the market’s next major advance.
It won’t be a comfortable process.
