Dip-buying day traders are helping fend off a looming stock collapse - and institutions have no choice but to follow suit, Morgan Stanley says

• Retail traders have remained "fervent" dip buyers, despite shaken consumers, Morgan Stanley said.
• The answer to whether the Evergrande-induced market dip scared away retail is "a definitive no," the firm said.

Retail traders' relentlessness in buying stock market dips has been a saving grace for major indexes, despite shaken consumer confidence, Morgan Stanley analysts said in a Monday note.

The analysts, led by chief US equity strategist Mike Wilson, said institutional investors are being forced to "cover and chase" as retail traders stay resilient in their strategy.

"Retail remains a fervent buyer of the dip even as supply [and] cost issues appear to be more persistent for both businesses and the consumer," the analysts wrote.

The market questioned whether the Evergrande-induced stock market decline last month jolted retail traders away from their buy-the-dip mentality. "Fast forward to today and the answer to that question is a definitive 'no,'" Morgan Stanley concluded.

That's because "retail investors remain steadfast in their commitment to buying equities, particularly on down days," the analysts said. "The correlation of buying to negative price action is strong."

Even so, consumer confidence has been rattled amid persistent supply chain issues and surging prices, the analysts wrote. And eventually, the markets will have to reconcile with those problems.

"This divergence between markets and confidence must be resolved over the next few months one way or another," the analysts said.

Hordes of retail traders have joined the markets since the COVID-19 pandemic, owing it to stimulus checks and more time at home. Most notably in January, the new group banded together to drive epic rallies in struggling stocks such as GameStop, AMC, and BlackBerry.

The traders, on social media like Reddit and Twitter, have even developed their own lingo. They frequently tout the phrase "buy the dip," which is often abbreviated to BTFD - with the extra F signifiying a popular curse word. They say the phrase after a stock has fallen in the hopes of helping it rise from the slump.