(Updates with close of Friday trading, adds details on VIX performance history)
NEW YORK, Feb. 5 (Reuters) – As the trading frenzy in GameStop Corp stock and other social media favorites wane, investors are seeing signs of potential market stress that could weigh on broader stock performance in the coming weeks.
For now, US equities seem to be looking past last week’s surge in volatility that led the S&P 500 to its largest weekly decline since October. Solid earnings, fiscal stimulus expectations and progress in nationwide vaccination efforts are pushing stocks back to record highs.
The S&P 500 and Nasdaq set records for a second session in a row on Friday.
However, some investors are concerned that wild swings in GameStop and other “meme” stocks have exacerbated concerns about market volatility and high valuations, which could make market participants more risk averse. The S&P 500 is near its highest price-earnings ratio in about two decades after climbing 74% from its low in March.
“The recent retail activity has been a cause for concern for the wider market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
According to BofA analysts, liquidity in futures on the S&P 500 dried up as market makers and other investors tried to mitigate risk during the GameStop surge. Earlier this week, “market fragility,” as measured by the bank, was at its highest level since March 2020, leaving US stocks extremely vulnerable to sudden market shocks, the company said.
Movements in the Cboe Volatility Index, known as the Wall Street “fear meter”, also indicate that investors may be more sensitive to market turbulence than usual. On January 27, the index rose 14 points, its largest one-day gain since March, when the S&P 500 lost 2.6%.
According to Stuart Kaiser, strategist at UBS, the fear meter climb was eight to 10 points higher than the expected move following such a fall in the S&P 500. The outrageous reaction, he said, points to heightened investor nervousness that could indicate greater sell-offs in the market in response to negative developments.
The VIX has since bounced back to its lowest level since early December as US equities rallied this week. Still, “I wouldn’t say we’re all over it,” Kaiser said.
Next week, investors will focus on the quarterly results of Cisco Systems Inc, General Motors Co and Walt Disney Co, as well as data on consumer prices in the US.
Options markets have not flashed the green light to move full steam ahead with risk resumption.
According to Charlie McElligott, managing director, cross-asset macro strategy at Nomura, investor demand for a reliance on the S&P 500, which is used to position for gains in the index, has risen after falling to an index earlier this week. low point in several decades. The swings in demand indicate the risk of a downturn and choppy trading in the coming weeks, he said.
Longer term, several market analysts say the GameStop effect may be little more than a radar screen bleep for the markets as a whole. According to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group, falls in the VIX of 20% or more to below 25 are promising for stocks, with the S&P 500 up 2.6% a month later.
Still, the exuberance that widens the market’s fault lines hasn’t entirely faded. According to data from Trade Alert, options activity shows that upward calls are in high demand in the SPDR S&P Retail ETF, including GameStop, and the iShares Silver Trust, which has also been rocked by retailers.
As a result, some investors say they plan to exercise caution for the time being, especially if exposed to passive funds that hold a large number of small-cap stocks that could be prone to sudden shopping frenzy.
“Time will tell if this has a more sustainable effect on the market,” said Matt Forester, BNY Mellon’s Lockwood Advisors chief investment officer. “We need to monitor our holdings to make sure we are not overly exposed to these trends.”
Reporting by April Joyner; Adaptation by Ira Iosebashvili, Nick Zieminski and Richard Chang