Market volatility has driven individual investor stock trading activity to elevated levels this year, with research data showing this week's retail sell-off is the fastest since the early days of the COVID-19 pandemic.

As US stocks staged a sharp rebound on Thursday, the question arises: has the emotional low point signaled a short-term market bottom?

Vanda Research reported on Wednesday that retail investors recorded the largest single-day net sell-off of individual stocks since the COVID-19 market crash on Tuesday. Unlike previous downturns, this retail crowd has not aggressively bought the dip, adopting a more cautious stance overall.

"Earlier this week, we discussed whether retail capital was about to return to the market. So far, signals are scarce. Instead, Tuesday saw the biggest net sell-off of individual stocks since the COVID crash," Vanda's team wrote in a note. The selling was concentrated in the memory chip sector, with Micron Technology, SanDisk, Seagate Technology, and Western Digital accounting for 88% of the day's $213 million net sell-off of individual stocks.

This year, retail investors have already net sold individual stocks on nine trading days. In contrast, during 2021, 2024, and 2025, there were zero such days. The memory chip sector, which saw a strong rally earlier this year, has suffered a sharp reversal amid the broader semiconductor retreat. Vanda noted that retail participation in stock trading is extremely high this year, with average daily individual stock turnover hitting a record $15.7 billion.

Despite the sell-off, signals suggest retail investors are not abandoning the stock market entirely. Vanda found that capital is flowing into more diversified ETFs as a "defensive alternative." "The market is forming a new norm: selling single stocks, buying broad-based index ETFs," Vanda noted. For example, on Tuesday, retail investors were net buyers of the Roundhill Memory & Semiconductors ETF (DRAM), which invests in global memory-related companies. FactSet data shows this ETF has fallen nearly 38% this month, though it remains up about 18% over the last three months due to the early-year rally. Vanda added that retail investors are not leaving the market but are "becoming much more picky in their stock selection," representing a broader behavioral shift toward reducing single-stock risk in favor of ETF allocation. The firm cautioned that if big tech earnings disappoint, this change could still pressure popular momentum stocks.

Goldman Sachs data this week also showed that the most crowded positions in the global AI trade have been quickly unwound amid deleveraging, with tech stock crowding falling to a near one-year low. The bank noted that historically, momentum reversals after crowded trades collapse often overshoot, and this round is already one of the more severe cleansings, suggesting large-scale forced liquidation may be largely complete.

BTIG Chief Market Technical Analyst Jonathan Krinsky warned that the rebound in momentum stocks is unlikely to last. He said that after the worst and fastest momentum stock crash in modern history, the market should experience a temporary breather, but urged investors not to blindly buy the dip. The Philadelphia Semiconductor Index (SOX) fell 5.3% on Wednesday, its worst single-day performance since early July, though it is still up 45% year-to-date, far outpacing the Nasdaq Composite's 5% gain. The sell-off on Wednesday was triggered by a rise in 30-year Treasury yields, which hit tech stocks hard. Meanwhile, the MSCI Industry Neutral Momentum Index fell 17.4% over four days, its largest such decline ever, surpassing the internet bubble burst, the 2022 bear market, and the post-COVID adjustment period.

Tactically, Krinsky expects a tech sector rebound, but based on historical patterns, it could be a bear market rally. Citing the 2000 internet bubble peak, when the SOX index fell 35% in a month, then rebounded 37% before declining again, he said, "We cannot confirm if history will repeat, but if a 20% rally occurs, the SOX will reach its 50-day moving average. We expect the index to likely face resistance there and eventually test the 200-day moving average." Krinsky suggested that a rebound in momentum stocks could come at the expense of non-tech sectors that have recently led. Additionally, the risk of a multi-year breakout in 30-year Treasury yields remains, which could act as a headwind for all recent leading assets. Rising yields deal a double blow to tech stocks: their valuations are highly dependent on long-term earnings expectations, which are discounted by higher risk-free rates, and it also raises corporate financing costs. The market is already questioning whether big tech's ongoing massive AI capital expenditures can generate returns.