Employees sort through harvested cannabis plants at Hexo Corp’s facilities in Gatineau, Quebec, Canada.

Chris Wattie | Reuters

Retail investors are snatching up any piece of the market to get in on the major comeback rally — this time its penny stocks. 

Stocks trading below $1 per share have an average gain of nearly 80% in the past week, according to a note from the Institutional Equity Derivatives team at Citadel Securities obtained by CNBC.

As economic conditions improve suddenly, stocks have rebounded sharply off their March lows. The Nasdaq Composite hit a new record high above 10,000 for the first time ever and the S&P 500 is close to the flatline for the year.

Some of the major market moves can be attributed to the rampant speculation in stocks by retail investors, who are favoring riskier plays in smaller dollar amounts. Commission-free and fractional trading, the lack of sports and even stimulus checks have played a factor in the retail investor surge

Some of these retail investors are piling into the battered names from the pandemic, like airlines and cruise operators. Others are snapping shares in bankrupt companies, like Hertz and J.C. Penney. Others, according to Citadel Securities, are favoring equities worth less than a buck. 

Citadel Securities looked at the 29 stocks in the small-cap benchmark Russell 2000 with a share price less than $1. In the past five trading days through Monday, the group is up an average of 79% a piece. J.C. Penney, Denbury Resources, Noble Corporation, Palatin Technologies are just a few of the stocks that trade below $1 per share in the Russell 2000.

READ ALSO  Intel's margins tumble as customers shift to cheaper chips, shares slide 10%

“This all amounts to what seems like a retail short-squeeze feeding frenzy that has reached blow-off top proportions,” Citadel Securities said in the note. 

Citadel Securities — which is a market maker, not to be confused with the hedge fund Citadel – wrote in the note to institutional investors that the market dynamic makes them nervous about equities in the short term. The note is not considered research and therefore, is not meant to provide actual investment advice, however.

The top 29 highest dollar stocks in the Russell 2000 futures rose just 4% over the same period, meaning low dollar stocks outperformed high dollar stocks by 75%, Citadel Securities’ data found. 

Plus, the iShares Russell 2000 ETF is up about 8% in the past five days, which means these $1 stocks are also outperforming the overall index by about 70%, Citadel Securities noted. 

Low dollar stocks are also grabbing retail investor attention. Cannabis stock Hexo, which trades around $1.05 per share, was the second most traded stock option based on volume on Monday.  

— with reporting from CNBC’s Leslie Picker

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.