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NEW YORK, Feb 5 (Reuters) – As the trading frenzy of GameStop Corp and other social media favorites moves away, investors see signs of potential market stress that could influence broader stock performance in the coming weeks .
For now, US equities appear to have seen an increase in last week’s volatility, which led the S&P 500 to its biggest weekly decline in October. Solid gains, fiscal stimulus expectations and progress in vaccination efforts nationwide lead stocks back to record highs.
The S&P 500 and Nasdaq set records for a second straight session on Friday.
Some investors, however, worry that wild fluctuations in GameStop and other “meme stocks” could have exacerbated concerns about market volatility and high valuations that could make market participants more risk-averse. The S&P 500 is nearing its highest price-to-earnings ratio in about two decades after hitting 74% of its March lows.
“Recent retail activity has been a concern for the wider market,” said Benjamin Bowler, head of global derivatives research at BofA Global Research.
Long-term liquidity on the S&P 500 dried up as market makers and other investors sought to reduce risk during the rise of GameStop, according to BofA analysts. Earlier this week, the bank’s “market fragility” peaked in March 2020, making US stocks extremely vulnerable to sudden market shocks, the company said.
Movements in the Cboe volatility index, known as the “fear gap” on Wall Street, also indicate that investors may be more sensitive to market turmoil than usual. On January 27, the index rose 14 points, the biggest one-day gain since March, as the S&P 500 lost 2.6%.
The increase in the gauge was eight to 10 points higher than the expected move following such a decline in the S&P 500, according to Stuart Kaiser, a strategist at UBS. The oversized reaction, he said, indicates increased nervousness among investors who could suggest higher sales in the market in response to negative developments.
VIX has since returned to its lowest level since early December, as US stocks rallied this week. Even so, “I wouldn’t say I’ve gone through it all,” Kaiser said.
Next week, investors will focus on quarterly corporate results from Cisco Systems Inc, General Motors Co and Walt Disney Co, as well as US consumer price data.
Option markets did not turn on the green light to go at full speed with the resumption of risk.
Investor demand for calls to the S&P 500, accustomed to positioning for index gains, rose after falling to a low of several decades earlier in the week, according to Charlie McElligott, general manager, macro-active strategy at Nomura. Rising demand indicates the risk of a pullback and a hectic trade in the coming weeks, he said.
In the long run, several market analysts say the GameStop effect could be no more than a moment on the radar screen for markets as a whole. VIX declines of 20% or more to below 25 tend to bode well for the S&P 500 to rise 2.6% a month later, according to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
However, the exuberance that increased the lines of error of the market has not completely disappeared. According to Trade Alert data, the options activity shows a high demand for upward calls in the SPDR S&P Retail ETF, which includes GameStop and iShares Silver Trust, which has also been influenced by retail trading.
As a result, some investors say they intend to be careful for the time being, especially if they are exposed to passive funds that hold a large number of small-cap stocks, which could be sensitive to a sudden retail frenzy.
“Time will tell if this will have a more lasting effect on the market,” said Matt Forester, chief investment officer of Lockwood Advisors at BNY Mellon. “We need to control our farms to make sure we are not overly exposed to these trends.”
Reporting by April Joyner; Edited by Ira Iosebashvili, Nick Zieminski and Richard Chang