Why Robinhood investors have an outsized impact on the market
Buy when a stock keeps going up. Sell when it keeps going down.
To quantitative investors, it’s dubbed the “momentum” trade -- rooted in decades of behavioral analysis, backtesting and academic rigor. To TikTok users @ChadandJenny, a basic version of this follow-the-trend strategy netted a more than 2,000 per cent return on the Robinhood app in a month, they claim.
“I see a stock going up and I buy it -- and I just watch it until it stops going up and I sell it,” the user known as Chad said in a video re-posted on Twitter on Sunday that has been viewed 1.8 million times. “I do it over and over and it pays for our whole lifestyle.”
As markets keep going up, day-trader bulls are claiming bragging rights and mesmerizing Wall Street.
The video, which brandishes a chart showing stellar gains in their trading account, struck a chord with the institutional crowd including AQR Capital Management co-founder Cliff Asness, a pioneer of the quantitative version of the momentum investing style.
While picking stocks is far harder than novices make it sound, an unabashed bid for the winning stocks remains ever-more lucrative.
The biggest momentum exchange-traded fund is already besting the broader market by two percentage points so far this year, after delivering eight percentage points of outperformance in 2020.
The allocation style is subject to crashes, especially around market regime shifts, but there’s no question that it’s netted billions in the rally since March.
Now, as fiscal stimulus feeds the new retail-trading mania, the top-performing stocks from Tesla Inc. to Etsy Inc. have just kept gaining. And speculative euphoria is booming in everything from penny stocks and call options to Bitcoin.
When systematic funds adopt momentum strategies, it’s usually a far more complicated process than what day traders can implement at home. Professional traders usually rank stocks by their past year’s performance and then adjust the results to give less weighting to companies at risk of short-term market reversals.
The rationale for the strategy recalls the bullish mantra on Robinhood: Stocks tend to go up. Since human beings move in a herd, a high-flying company can gain even more.
And as day traders increasingly hold sway over volumes and single stocks, more pros are sweeping Reddit, Twitter Inc. and social forums to find which companies are looking hot right now.
As for TikTok Chad, he has seized on his newfound fame with a new account: @crappywallstreetadvice.