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| Seasonal headwinds could test day traders' resilience. mihtiander/Getty Images |
Retail traders have enjoyed a sizzling summer, delivering gains that have left many professional money managers playing catch-up — and in some cases, licking their wounds. From bullish equity buying streaks to unexpected rallies in so-called “junk” stocks, individual investors have not only held their ground but have outperformed some of the market’s most sophisticated players. Yet, as September approaches, history and market dynamics suggest that their dominance could soon face a serious test.
According to Citadel Securities — which processes more than a third of all U.S. retail equity trades — Main Street investors have been on a remarkable buying spree over the past three months. Scott Rubner, the firm’s head of equity and equity derivatives strategy, noted that retail traders have bought stocks in 14 of the last 16 weeks since April. Options activity has mirrored this bullishness, with retail buyers taking long positions for 14 straight weeks. This confidence has been richly rewarded: from early June, the S&P 500 has risen about 8%, and since its low in early April, it’s climbed nearly 30%. The Nasdaq has fared even better.
What makes this surge particularly striking is its breadth. The rally hasn’t been confined to high-profile tech or AI-adjacent names; retail traders have piled into brick-and-mortar retailers like Kohl’s, American Eagle, and Krispy Kreme — companies with questionable long-term fundamentals and significant exposure to economic headwinds. Despite tariff concerns and recession warnings, these “garbage” stocks have defied expectations and traded higher than before tariffs were announced.
This wave of retail optimism has caught many institutional investors off guard. Citadel’s data shows that institutional clients have been net sellers in 8 of the past 12 weeks, reflecting a cautious approach in the face of macroeconomic uncertainty. Hedge funds, particularly quantitative equity funds that rely on models sensitive to fundamentals, have been hit hard by the junk stock rally. The divergence in positioning has been stark: while nimble day traders have capitalized on short-term momentum, some professional managers have been forced to watch from the sidelines or absorb losses.
Greenlight Capital, led by famed investor David Einhorn, is one example. Expecting a recession and a bear market earlier this year, the fund entered the summer cautiously. In an August 7 investor letter, Einhorn admitted that while his team anticipated the possibility of sharp countertrend rallies, they “didn’t expect the market to reach new all-time highs so quickly.” Greenlight lost 3.8% in the second quarter, reducing its year-to-date gain to just 4.1%. The letter reiterated the view that economic growth is slowing and that a recession could still be imminent — a perspective clearly at odds with the market’s bullish behavior.
August brought an added layer of complexity. A weaker-than-expected jobs report at the start of the month and signs of rising inflation initially sent stocks lower, but the market quickly rebounded the following week. Rubner observed that the U.S. stock market often moves independently of the broader economy, with competition intensifying for “dip alpha” — the strategy of buying shares after short-term declines, treating them as temporary discounts.
However, the seasonal shift from summer to fall may act as a reality check. Historically, September has been the weakest month for U.S. equities, with records dating back to 1928 showing consistent underperformance. Rubner likened August to a lazy day at the beach — a period when traders are less inclined to open new short positions — and September to a sudden cold plunge. Post-summer rebalancing by traders and mutual funds typically brings selling pressure as they cut underperforming holdings to position for the year’s final quarter.
For retail traders, the challenge is even sharper. September marks the lowest activity month of the year for individual investors, as participation rates steadily drop from summer highs. Whether this decline in activity is a cause or a result of weaker market performance is debatable, but the correlation is hard to ignore. If Main Street pulls back, the momentum that has supported risky stock rallies could dissipate quickly.
Greenlight Capital expects additional headwinds in the coming months, noting that outside of companies benefiting from the AI and data center boom, “it is hard to find other areas that are doing well.” They also anticipate that the full effects of increased tariffs will become visible in both consumer prices and economic data by September or October. Rubner has similarly warned that systematic, factor-driven strategies could reach maximum exposure by the end of August, leaving markets more vulnerable to downside shocks.
Former AQR Capital Management research head Aaron Brown offered his own take in a Bloomberg column, predicting that the “garbage rally” will likely lose steam. In his view, quick-moving traders who have locked in summer profits will come out ahead, while less agile day traders and longer-term investors who overpaid for junk stocks may be left holding the bag. Quant funds, meanwhile, could recoup some of their losses as prices normalize.
While retail participation in U.S. equities has grown steadily over the past few years, September’s combination of seasonal weakness, portfolio rebalancing, and macroeconomic uncertainty may finally put the brakes on their winning streak. Whether day traders can defy historical trends or will be swept aside by them remains one of the most intriguing market storylines heading into the fall.
