Robinhood traders are not behind the rally and their favorites actually underperform, Barclays says

• A flood of new retail investors into brokers like Robinhood, alongside the market's major rebound from the depths of its March low has developed into a popular narrative that new retail traders are driving the rally. 
• Barclays concluded there was no clear relationship between Robinhood customers adding shares and S&P 500 index moves. 
• Barclays' analysis — which uses Robintrack, which tracks Robinhood account activity but is not affiliated with the company — finds that just as some retail investors are cashing in, many others are getting the market all wrong and losing money. 
• "More Robinhood customers moving into a stock has corresponded to lower returns, rather than higher," Barclays told clients. 

The Robinhood application is displayed in the App Store on an Apple Inc. iPhone in an arranged photograph taken in Washington, D.C., U.S., on Friday, Dec. 14, 2018.Andrew Harrer | Bloomberg | Getty Images

Retail investors speculating in stocks are not responsible for the market's comeback and their top picks tend to underperform, according to Barclays. 

The Wall Street firm looked at historic data for Robinhood customers and examined their top holdings and closing stock prices. Barclays concluded there was no clear relationship between Robinhood customers adding shares and S&P 500 index moves. 

The analysis "casts doubt on the idea that retail holdings are the cause of market returns," Barclays analyst Ryan Preclaw told clients. 

VIDEO2:1802:18Top stocks on Robinhood get crushed in sell-offSquawk on the Street

A flood of new retail investors into brokers like Robinhood, Charles Schwab and TD Ameritrade, alongside the market's major rebound from the depths of its March low has developed into a popular narrative that new retail trades are driving the rally. The Silicon-Valley start-up said it saw a historic 3 million new accounts in the first quarter, while stocks experienced their fastest bear market and worst first quarter on record. Zero commissions, fractional trading and a lack of sports have also driven some young investors into the market. 

Some of the most popular stocks traded on the Robinhood app have been some of the biggest winners in the market. But Barclays said the correlation between the S&P 500 rallying since mid-March and Robinhood customer holdings jumping at the same time doesn't necessarily mean causation. 

Preclaw said that just because more Robinhood clients buy into Amazon and the e-commerce giant's stock rises, doesn't mean the e-broker presence it driving the stock. 

"Just because two things happen at the same time doesn't mean one causes the other," said Preclaw. "And while it's true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase."

Barclays' analysis — which uses Robintrack, which tracks Robinhood account activity but is not affiliated with the company — finds that just as some retail investors are cashing in, many others are getting the market all wrong and losing money. 

Net, net the Robindhood picks are underperforming, their analysis shows.

"More Robinhood customers moving into a stock has corresponded to lower returns, rather than higher," Preclaw told clients. "And while it's true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase." 

For example, cosmetic company Coty had been the worst performing name in the S&P 500 since mid-March 2020. But the number of Robinhood accounts that hold Coty has increased sixfold, a much bigger gain than that for Amazon, Barclays noted. 

The most bought stocks on the free-trading app over the past 24 hours were all in the red Thursday, according to RobinTrack, when the Dow violently plunged more than 1,800 points. Delta Airlines lost more than 14% on Thursday as Robinhood traders bought up shares. To be sure, the airline is up 9% in premarket trading on Friday. 

CNBC's Jim Cramer speculates that Wall Street pros may be buying Robinhood favored stocks in the premarket and then selling them to retail investors who buy during market hours. 

"Here's what they do, they buy in the early morning and then they flip it to Robin Hood types when the market opens and they make money. It's a game," said Cramer. 

— with reporting from CNBC's Michael Bloom. 

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Source: cnbc.com