'Day traders must know their limits': Investopedia Editor-In-Chief
Investopedia has seen another spike in its Investor Anxiety Index, despite stock’s snap-back rally since late March. Yahoo Finance’s Alexis Chrisoforous and Brian Sozzi discuss with Investopedia Editor-In-Chief Caleb Silver.
Video Transcript
BRIAN SOZZI: All right, market volatility is weighing on the minds of investors. Investopedia has seen another spike in its Investor Anxiety Index despite the snap-back rally in stocks since late March. Here to talk about it is Investopedia Editor-in-Chief Caleb Silver. Caleb, always good to see you here.
I do want to talk about this Anxiety Index, but I tweeted something at you this morning. What are people searching for on your site? It disturbs me a little bit. People are curious again on day trading.
CALEB SILVER: Right. So you mentioned earlier in the program day traders are out in force. They've been day trading that Hertz stock. As we can see, it's been on a wild ride. So they've been searching for, everything from day-trading techniques, rules to live by for new day traders to how to trade the options market. And when they're looking at technical analysis, they're looking at some really dangerous patterns. They're looking at trading the VIX, the two-time VIX short-term ETF. They're looking at ways to trade oil and oil stocks and oil ETFs that have a lot of volatility right now.
So this is obviously a new entrant to the market, people who are new to trading and new to investing that want to take advantage of these wild swings. But as you and I know and Alexis, we've seen this before, these are the most dangerous times to start day trading if you want to day trade at all. This is when people really get hurt.
ALEXIS CHRISTOFOROUS: Yeah, Caleb, and also I was taking a look at the top stocks that were traded by these sort of Robinhood investors as we're calling them, right, these retail investors. And Hertz was number one, which I still can't wrap my head around because the company has filed for bankruptcy. And then you've got a new kid on the block, Nikola, being the second-most-popular stock amongst those investors. What do you think that list is telling you about the way retail investors are viewing the market right now?
CALEB SILVER: Oh, they are playing a very risky game. Trading Hertz because, as you know, filed for bankruptcy, couldn't be any riskier. But we saw the same pattern with JCPenney. We've seen it with some other bankrupt companies or companies right on the verge of bankruptcy because the volatility in those stocks is so intense. Day traders who know what they're doing can get in and out. Those new to the market that try to trade those stocks, they can get burned pretty badly, especially if you're trading the options of a lot of these stocks that are at or close to bankruptcy right now.
So you see Hertz. You see Nikola, the electric-truck maker, you know, on the-- floating on the wings of Tesla, even though it's not a Tesla-owned company, doing very well in its debut. Top Ships, a Greek tanker company-- we wouldn't be talking about Top Ships normally accept the volume and day trading has been so intense there. And then the airlines, which have been so punished, but they rally 18% in a day, fall 25% the next. That's day trader manna, but it's super dangerous for new investors trying to get into that market.
BRIAN SOZZI: Caleb, what are some of your tips or just advice to people that are day trading this market? When I think about it, I hear day trading and I think late 1990s. I know people also searching for how to make money on penny stocks on your site too. What's your-- what's your advice to them?
CALEB SILVER: Well, don't do it or don't do it without learning how to do it first. There's ways to day trade where you can mitigate your risk as long as you set those parameters. I'm not going to trade more than, you know, 5% of my portfolio on this one stock. I'm going to put stop orders and limit orders in whatever trades I make. I'm not going to get emotional about buying stocks right now because this is a super-volatile time. You could lose your shirt in a day. You could gain two shirts back the next day. But you have to know what your limits are and make sure those risk parameters are there.
If you want to day trade a few thousand bucks or a very small percentage of your portfolio, as long as you have those risk parameters set up and you're following rules that match your own ability to take risk and take a loss, you can do it. But right now we see these account surging for Robinhood. We see online account activity growing at the Schwabs, E*TRADEs, and Fidelitys of the world. Traffic to our own online-broker reviews is up three times already this year.
So people are very interested, and they're getting in, but brokers love this because it's a lot of activity, even though trade commissions are free. But for traders-- new traders coming to the market, this is a time to get very educated on what you're doing before you get too burned.
ALEXIS CHRISTOFOROUS: Yeah, kind of a crash course in the markets, Caleb. And as your analysis pointed out, 3 million new Robinhood accounts in Q1 alone. But what do you make of others on the Street-- like Barclays, for instance, came out with some analysis saying, yeah, there's all this talk about Robinhood traders, but they're actually not what's moving the market, ultimately. Do you believe that? Are those traders more moving individual stocks than, say, the overall market direction right now?
CALEB SILVER: I think you nailed it, Alexis. I think they're moving individual stocks, but they also are moving into big blue chips like the Amazons, Googles, Facebooks, and Apples of the world. Those stocks, as we know, carry the entire market given how heavy they are with market cap. So they're loading into those as well.
But these are small traders that don't have the mass of an institutional investor. They may not be moving the market. They are moving individual securities within the market. As technical analysts like to say, it's a market of stocks, not necessarily a stock market. So there's that.
But then on the flip side, Goldman Sachs came out with a note this morning that said individual traders are outperforming institutional investors with a lot of the picks that they're making, which is probably going to make their head swell and make them want to do it even more. So Wall Street's very confused on the impact of the individual investor, but you can't deny that they're here and they're playing with very dangerous tools right now.
BRIAN SOZZI: And, Caleb, I didn't want to forget the Investor Anxiety Index. What is it-- what is it telling you-- telling us and you right now?
CALEB SILVER: It's screaming right now. I was on a few weeks ago, and it was screaming but only in the personal-finance part of it where people were very concerned about bankruptcy, liquidity, foreclosure, forbearance. That was what was spiking then.
In the last week, that's shifted, and now it's market-based anxiety to where people are looking up recession, bear market, bear-market rally, how to trade volatility. So you can see that the shift has gone right to the market, and people are really concerned about that, whereas personal finances have taken a backseat. That'll come back into play soon because we're going to run out of these unemployment benefits at the end of July.
BRIAN SOZZI: All right, we'll leave it there. Investopedia editor-in-chief Caleb Silver with some good tips. Don't be so quick to day trade, one takeaway for me.