NEW YORK (Reuters) – Some investors are increasingly concerned that wild swings in GameStop and other stocks driven by small traders could be new signs of overexuberance predicting volatility for the broader stock market.
GameStop shares closed 400% the week after the video game chain’s shares became a battleground between retailers and Wall Street professionals, a battle that has captivated investors around the world.
Some market viewers see those massive gains, as well as the moves in American Airlines and other highly short-short stocks, as an afterthought in a rally supported by Federal Reserve support, projected coronavirus control spending and COVID vaccines. -19 The US economy will pick up again later this year.
Fed chairman Jerome Powell earlier this week pushed back on the suggestion that super-low central bank interest rates and massive bond purchases were causing asset bubbles.
But those comments failed to allay some investors’ concerns that the Fed’s monetary policy has encouraged excessive risk-taking in broader markets: The S&P 500 is up 66% since March and stocks are close to their highest valuations in two. decades.
The campaign in GameStop and other stocks “certainly gives us some concern,” said James Ragan, director of asset management research at DA Davidson. “At the very least you have to take into account the chance of a market correction.”
The moves also led to some comparisons to the Internet stock mania two decades earlier.
“The mere fact that you have a group of investors really chasing abnormal profits is what reminds us of the dotcom bubble,” Ragan said.
Some barometers of general exaggeration are already flashing: Citi said his ‘panic / euphoria’ model is in ‘lofty euphoric territory’. And the most recent survey of BofA Global Research fund managers found that allocations to cash had fallen rapidly, indicating that investors are putting more money into riskier assets.
Frenzy of trading dominated Wall Street news this week, even as Apple Inc, Microsoft Corp and other corporate heavyweights reported quarterly results. The S&P 500 fell 3.3% this week, with trading volume rising above 24 billion shares on Wednesday, well above the average of 14.4 billion shares over the past 20 sessions. The CBOE volatility index closed above 30 points for the first time since early November this week.
A potential catalyst for further volatility could arise if hedge funds are forced to sell their positions to cover failed short selling bets, although it was unclear whether there would be enough such sales to create broad risk for equities .
Already some short-selling hedge funds seemed to be changing their approach. Short-seller Andrew Left, whose company Citron Research was one of the hedge funds to compete with small merchants over GameStop Corp this week, said in a YouTube video on Friday that his company would no longer publish short selling research.
Others said the increased activity from retail investors – who helped drive rallies in Tesla Inc and other names shares last year – could in itself be the latest sign of the market foaming.
“When you think of market bubbles, the last players to jump on board are retail, and that’s generally what’s happening now,” said Mike Mullaney, director of global market research at Boston Partners.
Analysts at LPL Financial question that the recent breaks in GameStop and other names point to a broader market bubble, and note that the market width – which measures how many stocks are in a rally – remains healthy and that credit markets are “working fine”.
“Maybe it’s just time for a break” in the S&P 500 rally, the company said in a report Friday.
However, others pointed to possible future turbulence in the market.
Stephen Suttmeier, technical research strategist at BofA Global Research, earlier this week urged clients to “take some profit” before February, a relatively weak month for stocks.
Other troubling signs include the explosion of special-purpose acquisition companies, or SPACs, and the surge in electric car company shares on the heels of Tesla’s earnings, said Scott Schermerhorn, chief investment officer at Granite Investment Advisors.
Still, he believes the frenzy over GameStop and other stocks is more of an “afterthought”.
Even after their rallies, the market cap of GameStop and other companies that have recently seen their shares rise “like a rounding error” compared to the broader market, he said.
Reporting by Lewis Krauskopf; Adaptation by Ira Iosebashvili and Jonathan Oatis