MW This is a bad sign for the stock market

By Mark Hulbert

Bull markets typically end when investors believe prices can only go up

Willingness to buy market dips is a contrarian indicator.

It's a bad sign that retail investors so eagerly bought last week's stock-market dip.

Last Friday, you may recall, the Dow Jones Industrial Average fell nearly 900 points DJIA. Rather than rush for the exits, which retail investors often do when the market plunges, this time they enthusiastically bet on a quick rebound. According to data compiled by my colleague Joseph Adinolfi, last Friday "saw the biggest total buying by the retail crowd since Jan. 27, 2021, the day when the original round of meme-stock mania reached its apex as shares of GameStop Corp. $(GME)$ soared."

This investor behavior is bearish, because willingness to buy market dips is a contrarian indicator: Market tops typically occur when investors treat dips as buying opportunities, according to contrarian theory. It's just the opposite at bottoms, when investors refuse to believe that any rally is sustainable - therefore treating every uptick in the market as an occasion to sell more.

Data compiled by Yale University finance professor Robert Shiller confirms this contrarian argument. Since 2001 he has been calculating a "Buy-on-Dips Confidence Index," which measures the percentage of retail investors who believe that the stock market will rise the day after big drops. As you can see from the accompanying chart, the S&P 500 on average performs far more poorly following high index readings than low ones.

Note that Shiller updates his buy-on-dips index with a several-month lag, so we don't know how retail investors' behavior last week will affect the October reading. But there can be little doubt that it's a bad sign that their rush to buy last Friday's dip is at a nearly five-year record high.

Robinhood data

Further evidence that last Friday's rush to buy the dip is a reason to be cautious comes from a study of Robinhood Markets (HOOD), the online-trading app that has attracted an enormous clientele among retail investors. The authors of the study, "Attention Induced Trading and Returns: Evidence from Robinhood Users," found that, on average, the stocks that are most heavily bought by Robinhood investors on any given day proceed to lag the market by 5% over the subsequent month.

The historical precedents don't guarantee that recent investor behavior will lead to market weakness. There have been past occasions, especially during bull markets' blow-off phases, when the market keeps rising in the face of extreme "buy-the-dip" behavior. But that doesn't mean risk hasn't risen to dangerous levels.

As Berkshire Hathaway's $(BRK.A)$ $(BRK.B)$ Warren Buffett warns us, the time to be fearful is when others are greedy.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

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October 17, 2025 12:38 ET (16:38 GMT)

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