Retail euphoria has been a dominant force in markets since the start of the year, propelling high-beta, short-interest, and momentum-driven stocks to outsized gains. The surge in speculative themes—such as unprofitable tech, highly shorted names, and Bitcoin-sensitive equities—has created strong returns, but history suggests this momentum may be at risk as tax season approaches.

Seasonal Weakness in High-Beta Factors

March and April have historically been difficult months for high-beta trades, with factors like Residual Volatility (Res Vol), Beta, and Short Interest consistently underperforming during this period. In fact, over the past four years, Res Vol has lagged in three of them, while Beta and Short Interest have also struggled.

This seasonal weakness may be partially driven by tax-related selling pressure. Investors who have benefited from strong retail-driven gains may look to take profits ahead of tax deadlines, leading to increased selling pressure on speculative names.

The Case for Fading Euphoria

The recent run-up in retail-favored stocks has been largely fueled by animal spirits, with Res Vol, Beta, and Short Interest names significantly outperforming since September. However, past instances of similar surges have often been followed by sharp reversals. A shift toward higher-quality stocks could provide a safer positioning strategy heading into the historically weak March-April period.

Retail and High-Beta Trades: A Strong Correlation

Data indicates a strong historical correlation between retail-driven stocks and factors like Res Vol, Beta, and Short Interest. At the same time, these speculative themes have shown a consistent negative correlation to high-quality stocks, reinforcing the idea that when euphoria fades, investors tend to rotate into more stable names.

With tax-related selling pressure looming and seasonal trends pointing to underperformance, it may be time to take profits on speculative trades and pivot toward quality. Investors who have benefited from the retail rally may want to consider locking in gains before the seasonal headwinds take hold.