In previous pullbacks, retail investors were accustomed to buying the dip; during Tuesday’s AI market correction, however, retail investors chose to cash out their individual holdings, marking nine consecutive days of net selling, with 88% of the $213 million in selling pressure concentrated in memory chips.
U.S. individual investors are rapidly reducing their positions in individual stocks, with selling pressure reaching its highest level since the early stages of the COVID-19 pandemic.
According to data from market research firm Vanda Research, retail investors recorded their largest net sell-off of individual stocks since the pandemic-induced market crash this past Tuesday.
Earlier this week, we looked for signs of retail investors returning, but there has been little clear evidence so far,” Vanda Research stated in its report. “Instead, retail investors posted the largest net selling of individual stocks since the pandemic crisis on Tuesday.”
In the past, when U.S. stocks experienced pullbacks, retail investors often actively "bought the dip." However, in this market correction driven by cooling AI-related trading, individual investors have shown greater caution.
According to Vanda Research, approximately 88% of the $213 million in net retail selling of individual stocks on Tuesday came from the memory chip sector, with Micron Technology (MU), SanDisk (SNDK), Seagate Technology (STX), and Western Digital (WDC) being the primary targets of selling.
This year, retail investors have been net sellers of individual stocks for nine consecutive trading days, a scenario that did not occur in 2021, 2024, or 2025.
The once-strong memory chip market has recently shown clear signs of cooling. As the broader semiconductor sector retraces, the market is reassessing whether the AI investment boom can continue to sustain high growth for chip companies.
However, retail investors have not fully exited the stock market. According to Vanda Research, individual investors averaged $15.7 billion in daily individual stock trades this year, reaching a record high. Compared to the past, they are reducing risk on individual stocks and shifting toward more diversified investment strategies.
"Selling individual stocks and buying broad-market ETFs is becoming a new trend," said Vanda Research.
For example, on Tuesday, retail investors bought the world’s first pure-play, actively managed memory ETF—the Roundhill Memory ETF (DRAM). Although the ETF has declined significantly this month, it has still posted gains over the past three months.
Vanda Research believes that retail investors are becoming more selective, not exiting the market, but reducing exposure to individual stock risk—a shift that could subject previously popular momentum stocks to greater pressure when they miss earnings expectations.
Fed meeting ignites markets, policy uncertainty intensifies volatility
U.S. stocks experienced sharp volatility on Wednesday. Following the second policy meeting under Federal Reserve Chair Kevin Warsh, the S&P 500 (SPX), Nasdaq Composite (COMP), and Dow Jones Industrial Average (DJIA) all plunged significantly. This was the worst-performing "Fed decision day" since December 2024.
After the Federal Reserve announced it would hold interest rates steady, stocks briefly rose but then quickly turned downward. The Dow Jones Industrial Average recorded its largest single-day decline since April 2025, while the Nasdaq 100 Index (NDX) entered technical correction territory, falling more than 10% from its all-time high set in June.
Wash avoided revealing future interest rate paths at the press conference again, instead emphasizing the importance of adjusting the Fed's decision-making approach.
Although the Federal Open Market Committee (FOMC) decided to hold rates steady, dissenting votes from three regional Fed presidents in favor of a rate hike led markets to believe that a rate increase later this year remains possible.
Market reactions indicate that investors are concerned the Federal Reserve may be underestimating inflation risks.
Jose Torres, Senior Economist at Interactive Brokers, said that Wash is "clearly lagging behind the market." He believes bond investors are concerned that the Federal Reserve may not act quickly enough to contain price pressures.
On Wednesday, long-term U.S. Treasuries experienced significant selling pressure. The yield on the 30-year Treasury rose to 5.213%, while the yield on the 2-year Treasury, which is more sensitive to interest rate expectations, fell to 4.287%, widening the spread between them by more than 14 basis points. This marked one of the largest term spread movements on a Fed meeting day since December 2023.
Neil Dutta, economist at Renaissance Macro Research, believes that Powell missed an opportunity to demonstrate the Fed’s commitment to fighting inflation. “If credibility isn’t built through rate hikes, it must be proven through clear communication,” Dutta said.
Market cushion weakens, volatility risk increases
In fact, the options market had already signaled risk ahead of the Federal Reserve's interest rate decision.
Daniel Roos, founder of market volatility research firm VolSignals, said that the gamma exposure of S&P 500 options traders has declined to low levels for the third consecutive trading day. Roos refers to this metric as Wall Street’s “market cushion.”
When an options trader's gamma exposure decreases, their ability to stabilize market volatility through hedging operations weakens, making stock prices more susceptible to large swings.
Historical data shows that similar situations have occurred six times over the past approximately 500 trading days. Previous cases indicate that the S&P 500 index experienced an average volatility of 8.9% in the following month, about 2.5 times the normal level.
However, Rose stated that this signal does not mean the market will necessarily continue to decline, but rather that the range of market volatility is expanding. “It doesn’t tell investors whether the market will go up or down next, only that the market’s safety cushion is shrinking,” he said.
Currently, retail investors reducing their exposure to individual stocks, capital shifting toward ETFs, uncertainty around Federal Reserve policy, and declining market liquidity protections are collectively amplifying short-term volatility in the U.S. stock market.
In the future, the financial performance of tech giants and subsequent policy signals from the Federal Reserve will be key factors determining market direction.