Mania in shares like GameStop, rising possibility exercise suggests an imminent market decline

A visitor in front of the Wall Street Bull, a bronze sculpture in the financial district of Manhattan, New York, May 19, 2020.

Timothy A. Clary | AFP | Getty Images

Speculative trading in some highly dynamic stocks and options could signal a near-term spike, but the bull market is likely to continue for some time, fueled by the prospect of an improving economy and easy Fed money, investors said.

Julian Emanuel, head of equity and derivatives strategy at BTIG, said the spike in option buying and frothy trading in some soaring stocks was very similar to the period before the tech bubble crashed in 2000. He said it was very possible if the market behaves the same as the S&P 500 could soar to high 5,047 before the end of the bull market, although it does not forecast such a surge.

Most strategists expect the S&P 500 to end higher this year, with CNBC’s strategist poll at a median of 4,100. However, many expect at least one retreat earlier in the year. The S&P 500 closed at 3,855 on Monday, up 0.4%.

“We don’t see any concrete signs of a medium-term spike yet, but this type of volatility leads us to believe that, similar to 1999-2000, you could see a 10% to 15% pullback at any time.” “Emanuel said.” From what we are currently seeing, the level of speculation leads us to conclude that the typical retail investor is overall as optimistic as we have seen in over 20 years. With the reviews where they are now, this is the recipe for potentially quick, if not temporarily, reset in the market. “

Bank of America’s global strategists also fail to see the market bubble bursting anytime soon. “Even the foamy stock indices lag well behind in previous bubbles. The NASDAQ is up 96% over the past three years,” they write. “It rose 201% from its high in early 2000 (after which it fell 72%). The S&P is up 44% compared to 98% in the late 1990s. The MSCI World ex US is currently flat for over 3 years so no bubble there. “

Short Squeeze Frenzy

Trading on Monday with some highly dynamic names briefly warned some traders. The flagship of the recent frenzy, GameStop rose to a high of $ 159.18 before reversing hard and falling below $ 70. It ended the day at $ 76.79, up 18% from the day. The company is highly short and is one of a number of stocks that it is targeting.

“For the past few days, they’ve only been picking the shortest names to put one final pressure on,” said Scott Redler, partner at T3Live.com. GameStop is a popular name on Reddit’s Wall Street Message Board.

AMC is another stock that rose sharply, closing 26% on Monday. Another short, Bed Bath and Beyond, was very volatile, hitting a high of $ 47.73 before closing at $ 30.68, still up 1.6% that day. Shares of other retailers, like Nordstrom, rose more than 10% on Monday before falling to 1.7%.

“Right now there is definitely a certain excess that some pros are scratching their heads with,” said Redler, focusing on short-term technical details. “You don’t want to fight the excess, but there is nothing wrong with being a little more careful. Why be aggressive with something like Apple when it goes into profit on a Wednesday?”

Redler said he had become more cautious, and wild trading Monday brought some level of fear back to the market for the first time in some time.

Accumulation of call options

The frenzied trading comes at a time when smaller investors are adding much more to the daily volume on the stock market. This has been particularly true since the pandemic, when e-commerce creates easy access to investments for free. At the same time, investors are piling up on individual names in call options at a record pace and have been rewarded as the action drives traders to buy stocks.

“It’s the network effect of social media that amplifies the kind of thing we saw in 1999 and 2000 in relation to day traders who are able to move select stocks higher,” said Emanuel. “It is compounded by the fact that you now have limited risk and reward, under the guise of short-term options that we used extensively in late summer. At the time, it caused an overshoot in technology and value stocks We are now seeing this not only with the same large-cap tech stocks, but also with second- and third-tier stocks. “

Emanuel said the bubble eruption in 2000 had a dire impact on retail investors, with many feared to return to the market for a long time and some still too conservative. “I would refuse to call this the full mania phase, but based on what we’ve seen over the past few days, there are all indications that this dynamic that you will have is continuing,” he said.

Emanuel said the pandemic could become a major driver of the market again and there are concerns that if the vaccine rollout does not improve and the virus worsens, investors will once again have double-dip recession concerns in the second quarter .

Trading in the pandemic was evident on Monday as investors ditched travel stocks such as airlines, casinos and cruise lines. Tech, the stay-at-home game, was higher, and names like Facebook, Apple, and Amazon all won.

Emanuel said even if there is a pullback, the higher trend doesn’t seem to be over. If the S&P hit above 5,000 it would be trading a multiple of 30 from the current 23. This would not be without precedent since in the tech bubble and also in 1929 the market value for money was around 33, he said.

“We’re back to 1999. I just don’t know what part of this year,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.