/Trading strategy: 40 stock picks with high retail volumes, Goldman Sachs

Trading strategy: 40 stock picks with high retail volumes, Goldman Sachs

  • Retail trading mania is back in full swing with more fervor than ever before.
  • A new report from Goldman Sachs shows how investors can leverage “small lot” volumes to secure profits and avoid losses.
  • We list 40 stocks with high “small lot” trading volumes, according to Goldman Sachs analysts.
  • See more stories on Insider’s business page.

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.

AMC "small lot" trading activity case study from Goldman Sachs research note

AMC “small lot” trading activity case study from Goldman Sachs research note

Goldman Sachs

“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.

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