The retail trading mania that captured the attention of global investors in January has returned in full force.
Several stock market experts had expected the retail trading frenzy to subside once people began returning to more normal life as society reopened after the pandemic.
However five months on, retail trading has returned with fervor as traders shift from one meme stock to the next.
Just this week, non-traditional meme stocks such as Clover Health (CLOV), Clean Energy Fuels (CLNE), ContextLogic (WISH) and Wendy's (WEN) have seen their stock prices suddenly surge, sometimes more than doubling.
The so-called Reddit traders identify a stock against which there are big bets - called short interest - and they drive the price up to force the short sellers to buy back those bets.
And it's having an impact on broader market dynamics. A recent report from Barclays shows how a tally of stocks with high short interest has come down dramatically this year.
With the trend looking like it's here to stay for the long-term, Goldman Sachs' options research team released a new report on June 9 looking at "small-lot trading" volumes, which typically reflects retail trader activity.
The analysts examine the case studies of four popular retail stocks and their small-lot trading volumes to understand how retail trading can influence profit and loss even for bigger investors.
"While only time will tell whether these trends represent a structural change, our analysis suggests retail trading activity continues to be a leading indicator (rather than contrarian)," Goldman Sachs analyst, John Marshall, said in the report.
Turning down the volume
Small-lot trading is a tool Goldman Sachs uses to identify companies with significant retail trading activity. The team uses data on holdings of both shares and options.
For shares, the team classifies trades that are below $2,000 as small. For options, the team considers a holding small if the number of contracts multiplied by the stock price is worth less than $5,000.
Then each day, the team calculates the notional volume from small shares and options trades on an absolute basis as well as relative to overall volume, which gives an idea of retail trading activity.
"While this clearly includes small professional trades, this threshold is necessary to limit the bias toward high dollar priced stocks," Marshall said.
The analysis includes the stocks in the S&P 500, as well as any names that are in the 100 most-traded options based on notional volume.
"We prefer quantitative measures of retail trading participation that can be applied across all shares and options that trade on exchange," Marshall said. "These measures allow us to categorize and compare trades across stocks and through time to identify unusual activity. This led us to estimate the proportion of retail trading using our 'small lot' trading methodology."
While the team have typically used their "small lot" trading methodology to analyze this, they have also expanded the framework to include data that estimates retail trading volumes based on price characteristics of trades from Goldman Sachs' Trade Reporting Facility (TRF).
"Both methodologies have shown similar returns in recent months," Marshall said. This has increased the teams confidence in using a combined model of the two strategies going forward to get the most accurate results.
Using the data to trade
The team looked at four case studies of popular retail stocks (Gamestop, AMC, Palantir and Workhorse Group ) and their small-lot trading activity to understand what was happening in the market.
They found that retail traders opted either to buy, or not buy, a stock, rather than selling it short, as the hedge funds do. So when they pay attention to a stock, it results usually in a temporary flow of net buying, with no resistance from short sellers, which can push up the price quickly.
"Buying stocks following a high proportion of volume in 'small lot' trading has been profitable since the market's recent bottom on 12-May," Marshall said.
The initial volatility then attracts institutional investors who see opportunities to use their usually more sophisticated understanding of options positioning, as well as the delta-hedging requirements that market makers will have, as well as their own fundamental valuations to then make sizeable profits, Marshall said.
"Our analysis suggests that small-lot trading declines prior to the peak in share price, implying that large traders drive stock price moves prior to and following the peak in the episodes we analyzed," Marshall said.
Timing is everything when using small-lot volume as a trading indicator.
When retail trading as a total percentage of overall volume drops, this is the point at which institutional investors position for a partial mean reversion, which is a financial theory that suggests that even with an outsized price move, an asset's volatility and historical returns will eventually return to what they have typically been in the longer run.
"As our methodology simulates avoiding stocks ahead of the largest days of volatility, it has allowed our framework to avoid the largest declines following elevated retail investor activity," Marshall said.
So buying stocks with high small-lot volume can be profitable, but investors must pay attention to any shift in percentage that retail trading activity makes up out of total volume, because this will usually herald the turning point in the share price.
Retail trading stocks to watch
Goldman Sachs identified 100 stocks with high "small lot trading" activity in shares and options based on the research.
Insider lists the top 20 "small lot trading" activity in shares and top 20 "small lot trading" activity in options from their report, which is based on data as of June 6.
1. Tilray Inc
Ticker:TLRY
Type (Shares or options): Shares
Small shares trade amount: $154 million
Small shares trade as percent of overall volume: 23%
One-week performance: 18%
Source: Goldman Sachs
2. Workhorse Group
Ticker:WKHS
Type (Shares or options): Shares
Small shares trade amount: $120 million
Small shares trade as percent of overall volume: 22%
One-week performance: 49%
Source: Goldman Sachs
3. Marathon Oil
Ticker:MRO
Type (Shares or options): Shares
Small shares trade amount: $36 million
Small shares trade as percent of overall volume: 22%
One-week performance: 13%
Source: Goldman Sachs
4. Fuelcell Energy Inc
Ticker:FCEL
Type (Shares or options): Shares
Small shares trade amount: $84 million
Small shares trade as percent of overall volume: 20%
One-week performance: 17%
Source: Goldman Sachs
5. General Electric
Ticker:GE
Type (Shares or options): Shares
Small shares trade amount: $54 million
Small shares trade as percent of overall volume: 10%
One-week performance: -1%
Source: Goldman Sachs
6. Marathon Digital Holdings
Ticker:MARA
Type (Shares or options): Shares
Small shares trade amount: $19 million
Small shares trade as percent of overall volume: 10%
One-week performance: -2%
Source: Goldman Sachs
7. Ford Motor
Ticker:F
Type (Shares or options): Shares
Small shares trade amount: $131 million
Small shares trade as percent of overall volume: 9%
One-week performance: 9%
Source: Goldman Sachs
8. Riot Blockchain Inc
Ticker: RIOT
Type (Shares or options): Shares
Small shares trade amount: $19 million
Small shares trade as percent of overall volume: 8%
One-week performance: 6%
Source: Goldman Sachs
9. NRG Energy
Ticker:NRG
Type (Shares or options): Shares
Small shares trade amount: $6 million
Small shares trade as percent of overall volume: 7%
One-week performance: 7%
Source: Goldman Sachs
10. Under Armour
Ticker:UAA
Type (Shares or options): Shares
Small shares trade amount: $10 million
Small shares trade as percent of overall volume: 7%
One-week performance: -2%
Source: Goldman Sachs
11. Mosaic Company
Ticker:MOS
Type (Shares or options): Shares
Small shares trade amount: $10 million
Small shares trade as percent of overall volume: 7%
One-week performance: -1%
Source: Goldman Sachs
12. DISH network
Ticker:DISH
Type (Shares or options): Shares
Small shares trade amount: $8 million
Small shares trade as percent of overall volume: 7%
One-week performance: 3%
Source: Goldman Sachs
13. Gap
Ticker:GPS
Type (Shares or options): Shares
Small shares trade amount: $8 million
Small shares trade as percent of overall volume: 6%
One-week performance: -6%
Source: Goldman Sachs
14. Valero Energy
Ticker:VLO
Type (Shares or options): Shares
Small shares trade amount: $14 million
Small shares trade as percent of overall volume: 6%
One-week performance: 3%
Source: Goldman Sachs
15. Hess
Ticker:HES
Type (Shares or options): Shares
Small shares trade amount: $6 million
Small shares trade as percent of overall volume: 6%
One-week performance: 6%
Source: Goldman Sachs
16. Diamondback
Ticker:FANG
Type (Shares or options): Shares
Small shares trade amount: $7 million
Small shares trade as percent of overall volume: 6%
One-week performance: 9%
Source: Goldman Sachs
17. Quantumscape Corp
Ticker:QS
Type (Shares or options): Shares
Small shares trade amount: $29 million
Small shares trade as percent of overall volume: 6%
One-week performance: 17%
Source: Goldman Sachs
18. Tapestry
Ticker:TPR
Type (Shares or options): Shares
Small shares trade amount: $9 million
Small shares trade as percent of overall volume: 6%
One-week performance: -3%
Source: Goldman Sachs
19. Halliburton Company
Ticker:HAL
Type (Shares or options): Shares
Small shares trade amount: $8 million
Small shares trade as percent of overall volume: 6%
One-week performance: 8%
Source: Goldman Sachs
20. Harley-Davidson
Ticker:HOG
Type (Shares or options): Shares
Small shares trade amount: $4 million
Small shares trade as percent of overall volume: 6%
One-week performance: -3%
Source: Goldman Sachs
21. Digital Realty Trust
Ticker:DLR
Type (Shares or options): Options
Small options trade amount: $24 million
Small options trade as percent of overall volume: 100%
One-week performance: 5%
Source: Goldman Sachs
22. Marathon Oil
Ticker:MRO
Type (Shares or options): Options
Small options trade amount: $28 million
Small options trade as percent of overall volume: 100%
One-week performance: 13%
Source: Goldman Sachs
23. Workhorse Group
Ticker:WKHS
Type (Shares or options): Options
Small options trade amount: $291 million
Small options trade as percent of overall volume: 100%
One-week performance: 49%
Source: Goldman Sachs
24. ONEOK
Ticker:OKE
Type (Shares or options): Options
Small options trade amount: $37 million
Small options trade as percent of overall volume: 98%
One-week performance: 5%
Source: Goldman Sachs
25. Riot Blockchain Inc
Ticker:RIOT
Type (Shares or options): Options
Small options trade amount: $202 million
Small options trade as percent of overall volume: 97%
One-week performance: 6%
Source: Goldman Sachs
26. EOG Resources
Ticker:EOG
Type (Shares or options): Options
Small options trade amount: $33 million
Small options trade as percent of overall volume: 96%
One-week performance: 8%
Source: Goldman Sachs
27. Marathon Digital Holdings
Ticker:MARA
Type (Shares or options): Options
Small options trade amount: $132 million
Small options trade as percent of overall volume: 96%
One-week performance: -2%
Source: Goldman Sachs
28. Ford Motor
Ticker:F
Type (Shares or options): Options
Small options trade amount: $654 million
Small options trade as percent of overall volume: 96%
One-week performance: 9%
Source: Goldman Sachs
29. Discover Financial
Ticker:DFS
Type (Shares or options): Options
Small options trade amount: $30 million
Small options trade as percent of overall volume: 96%
One-week performance: 5%
Source: Goldman Sachs
30. Phillip Morris
Ticker:PM
Type (Shares or options): Options
Small options trade amount: $41 million
Small options trade as percent of overall volume: 96%
One-week performance: 2%
Source: Goldman Sachs
31. Tilray Inc
Ticker: TLRY
Type (Shares or options): Options
Small options trade amount: $639 million
Small options trade as percent of overall volume: 96%
One-week performance: 18%
Source: Goldman Sachs
32. Best Buy Inc
Ticker:BBY
Type (Shares or options): Options
Small options trade amount: $64 million
Small options trade as percent of overall volume: 96%
One-week performance: 1%
Source: Goldman Sachs
33. Palantir Tech
Ticker:PLTR
Type (Shares or options): Options
Small options trade amount: $770 million
Small options trade as percent of overall volume: 96%
One-week performance: 7%
Source: Goldman Sachs
34. Whirlpool Corp
Ticker:WHR
Type (Shares or options): Options
Small options trade amount: $34 million
Small options trade as percent of overall volume: 96%
One-week performance: -1%
Source: Goldman Sachs
35. Honeywell
Ticker:HON
Type (Shares or options): Options
Small options trade amount: $48 million
Small options trade as percent of overall volume: 95%
One-week performance: -1%
Source: Goldman Sachs
36. Lennar Class A
Ticker:LEN
Type (Shares or options): Options
Small options trade amount: $46 million
Small options trade as percent of overall volume: 95%
One-week performance: -3%
Source: Goldman Sachs
37. Devon Energy Corp
Ticker:DVN
Type (Shares or options): Options
Small options trade amount: $46 million
Small options trade as percent of overall volume: 95%
One-week performance: 16%
Source: Goldman Sachs
38. Apache Corporation
Ticker:APA
Type (Shares or options): Options
Small options trade amount: $23 million
Small options trade as percent of overall volume: 94%
One-week performance: 13%
Source: Goldman Sachs
39. MGM Resorts
Ticker:MGM
Type (Shares or options): Options
Small options trade amount: $61 million
Small options trade as percent of overall volume: 94%
One-week performance: 1%
Source: Goldman Sachs
40. Abermarle
Ticker:ALB
Type (Shares or options): Options
Small options trade amount: $24 million
Small options trade as percent of overall volume: 94%
One-week performance: 2%
Source: Goldman Sachs