Stock Market Jackpot Bells just keep ringing

Photographer: Kiyoshi Ota / Bloomberg

Like a slot machine that pays off with every pull, the most reliable bets in the stock market are often the riskiest of late.

Long go for a company that sounds like something Elon Musk is talking about a tweet (but wasn’t)? Signal Advance Inc. has just gone up 12 times. Loan money to a software maker to buy Bitcoin? A Microstrategy Inc. convertible bond is up 50% in four weeks (option is in the money). Backing up the truck on bullish options after the Nasdaq 100 doubled in 24 months? Wednesday was the fourth busiest day ever for call trading in the US (the other three were last year).

Throw an arrow, hit a winner, or so it seemed lately. Encouraged by Federal Reserve stimulus, vaccines, and the psychological conditioning that comes when a bad patch doesn’t persist, just about everyone from retail entrants to institutional executives to monetize the 10-month-old meltup. Of course, all of this could take weeks, if not months, without even a small reversal. Predicting precisely when such a fever will break is a near-impossible task. But bubble alerts start blaring from every angle.

“It’s a downright mania, and the bull’s relative youth doesn’t make it ‘safer’ to climb aboard,” Doug Ramsey, Leuthold Group’s Chief Investment Officer, wrote in a Jan. 8 report to clients – which continues noted that his company was also among the buyers. “We are just as guilty as the others in chasing this momentum”

The chasing works. Four days after the year ended at nearly 40 times its profit, the Nasdaq 100 Index posted its largest gain in two months. Hedging against shares, on the other hand, was costly. A basket of favorite short positions in managers went against them last week by 10%, the highest recovery in seven months. Hoping that the mania will all go away also turns out to be pointless. The frenzy over special purpose acquisition companies continued, with a fresh dozen making IPO filings on Friday, including one with the ticker “LMAO. “

“Too much foam, too much complacency,” said Matt Maley, the chief market strategist at Miller Tabak + Co., who thought last week’s spectacle in Washington would have at least slowed the frenzy. “After rallying 16% in just two months and a 70% rally since March, that news should have crushed the market. A correction of 10% -15% would be normal and healthy. “

Tesla Inc. adding 25% to a market value of nearly $ 700 billion in five days made headlines last week, but for real foam, the options market was the place to look. Calls expiring on Jan. 15 with a strike price of $ 1,000, the most traded Tesla option on Friday, quintupled on Friday, ending the week at $ 9.15 after an initial price of 53 cents each.

Individuals appear to be driving the action, according to JPMorgan Chase & Co., who quoted a proxy for NYSE margin account data indicating a potentially strong improvement in December over previous months. Buying call options for small traders has fallen violently after a seasonal dip in the last week of December, as has retail-focused off-exchange trading, the bank says.

“The liquidity force seems to be reverberating in an intense way through private investors again, in a repeat of last year’s second quarter,” strategists led by Nikolaos Panigirtzoglou wrote in a note on Friday. “Given the expectation of further fiscal support, this strength is likely to continue for the coming weeks.”

The industry has noted this. Cboe Global Markets Inc. has adapted products to smaller investors. It revamped the mini-S&P Index options to increase liquidity and provide better execution for retail clients, after it was said in June that it would revive a mini-VIX product aimed at least in part at smaller merchants.

The company tried to “create a number of products that take into account these changes in investor demand that we believe will remain here,” said Arianne Criqui, Cboe’s chief of derivatives and global customer services in a November interview. They noted that Robinhood Markets Inc. says only about a fifth of its clients trade options. “We see a huge benefit” for more people to begin with, she said.

Jason Goepfert of Sundial Capital Research has been raising flags about the strength of retailers in the options market since late December. He cited data on the number of phone purchases and the money spent on them – with the smallest participants accounting for 54% versus 28% for the largest.

“Looks like it has gotten worse,” Goepfert wrote in a note on Tuesday. “The most reliable measures of sentiment are usually those that focus on real money and leveraged instruments. Then emotion has the greatest impact. Looking at some of the most leveraged vehicles available to investors, there is widespread evidence of extreme speculation. “