This paper provides new evidence on the predictive power of retail trading for future stock returns using tick data from the Chinese stock market. We explore sources of the predictive power from the novel perspective that sophisticated retail investors may exploit predictive information by observing limit order book and inferring institutional trading intentions. Employing a two-stage decomposition approach, we decompose the retail order imbalance into four components and find that the component related to retail investors’ perception of institutional trading intentions significantly contributes to the predictive power of the retail order imbalance for future returns, accounting for more than 15%.