A September Showdown Is Looming for Retail and Professional Traders

Day traders have had a blockbuster summer, outpacing professional money managers and leaving some hedge funds bruised. But that dominance may be short-lived.

If historical trends hold, a seasonal pullback in retail activity could collide with a surge in volatility this September, threatening to derail the rally they helped drive.

While nothing has topped the meme-stock craze of 2021, retail traders have been enjoying a busy — and lucrative — summer.

Citadel Securities, which handles more than a third of the US retail equity trades, said in a client note last week that Main Street has remained consistently bullish over the last three months. Retail has bought up stocks in 14 of the last 16 weeks since April and options buying has been bullish for 14 consecutive weeks, according to Scott Rubner, head of equity and equity derivatives strategy at the Miami-based trading giant.

Their optimism has been rewarded. The S&P 500 has gained 8% since June and nearly 30% since its low in early April. The Nasdaq has fared even better. It’s not just AI-adjacent companies driving the gains, either — day traders have led a rally in so-called “garbage” stocks with questionable business prospects, such as brick-and-mortar retailers Kohl’s, American Eagle, and Krispy Kreme.

Many professional money managers, by contrast, have missed the boat on the stock rally, taking a cautious approach amid signs of economic threats. Citadel Securities’ institutional clients have been bearish 8 of the past 12 weeks, Rubner said.

Some hedge funds have been punished. The surge in junk stocks has confounded models at equity quant funds, contributing to a weekslong bloodletting, Business Insider previously reported.

Many long-short equity hedge funds have navigated the market well, but those with more pessimistic outlooks have faltered.

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One hedge fund exec told BI that brick-and-mortar retailers with significant tariff exposure nonetheless trading higher than before tariffs were announced — especially with recession indicators blinking — “doesn’t make sense to us fundamentally.”

David Einhorn’s Greenlight Capital — which in the first quarter believed a recession and bear market were in the offing — lost 3.8% in the second quarter, trimming its year-to-date gain to just 4.1%, according to an August 7 investor letter seen by Business Insider.

“While we anticipated the possibility of ‘rip your face off’ rallies, we certainly didn’t expect the market to reach new all-time highs so quickly,” the letter reads. “We still believe that the economy is slowing and could very well be headed into a recession. The market obviously disagrees.”

The diverging views among professional and amateur investors hit a new level in August after an unexpectedly poor jobs report and signs that inflation is ticking back up. Stocks fell that Friday, August 1 — but quickly rallied the following week.

“The US stock market does not always reflect the broader economy,” Rubner wrote, noting that competition is increasing for “dip alpha” — that is, investors are quick to buy stocks after a market dip, betting that stocks just went on sale and will rise in short order.

A critical pivot point

As we head toward fall, the stage is set for a reversal of fortune.

If August is a lazy day at the beach for the stock market, September is like an icy cold plunge. While stocks generally rise in August — “consistent with the number of vacations, pool parties, and the general unwillingness to put on a new short during August,” Rubner says — September is the worst month for performance, according to data going back to 1928.

It’s also historically more volatile.

This persistent seasonal quirk is in part a byproduct of the summer holiday — traders return from vacation and rebalance their books as they gear up for an end-of-year push, cutting positions to make room for new ones. Many mutual funds similarly rebalance in September, dumping losing positions and adding to the downward pressure.

September is also the nadir for retail traders. Retail participation traditionally thins as fall arrives, decelerating in August before hitting September, the lowest activity month of the year.

Whether they’re reacting to September’s historic weakness or a factor in driving it, if Main Street money pulls back, that may take some wind out of the market’s sails. And both macroeconomic and fundamental weaknesses that the market previously shrugged off could loom large.

Einhorn’s Greenlight says outside of companies benefiting from AI and the data center boom, “it is hard to find other areas that are doing well.” The fund expects “the increased bite from tariffs to show up on shelves and in the data by September or October.”

Additionally, Rubner expects systematic, factor-driven strategies to reach full exposure by the end of August, “increasing vulnerability to downside shocks.”

In dissecting the rally in junk stocks and corresponding quant hedge fund losses, former AQR financial market research head Aaron Brown said in a column for Bloomberg that the likeliest resolution “is that the garbage rally runs out of steam and the junk stock prices sag back.”

He continued: “The nimble traders who took daily profits keep their winnings, the quant funds make back their losses, and the losers are less nimble day traders and medium or long-term investors who overpaid for junk.”

Overall retail participation in the US stock market has steadily increased, but a showdown is looming next month. Seasonal headwinds could test the resilience of the day traders and end their summer winning streak over the professional money managers.