NEW YORK (Reuters) – Some investors are increasingly concerned that wild fluctuations in GameStop and other small-market-driven stocks could be fresh signs of over-exuberance that foreshadow volatility for the wider stock market.
GameStop shares closed 400% for the following week after the video game chain’s shares became a battleground between retailers and Wall Street professionals, a confusion that captivated investors around the world.
Some market watchers see these massive gains, as well as American Airlines moves and other sharply shortened stocks, as a side show in a rally backed by Federal Reserve support, anticipated spending to save the coronavirus and expectations that COVID-19 vaccines will help the economy. The United States returned at the end of this year.
Earlier this week, Fed Chairman Jerome Powell rejected suggestions that very low central bank interest rates and massive bond purchases create asset bubbles.
But those comments have failed to dampen investors’ concerns that the Fed’s monetary policy has encouraged excessive risk-taking in wider markets: the S&P 500 has risen 66 percent since March, and equities are close to the highest valuations. from the last two decades.
The GameStop and other actions “certainly give us cause for concern,” said James Ragan, director of wealth management research at DA Davidson. “At the very least, you have to consider that there is a chance of a market correction.”
The moves also drew some comparisons to the mania of stock on the internet two decades earlier.
“Just the fact that you have a group of investors who are really looking for abnormal gains, that’s reminiscent of the dot-com balloon,” Ragan said.
Some barometers of general over-exuberance are already intermittent: Citi said that his “Panic / Euphoria” model is on “high euphoric territory”. And the latest survey conducted by BofA Global Research on the fund manager showed that cash allocations have fallen rapidly, indicating that investors are investing more funds in riskier assets.
The frantic transaction dominated Wall Street news this week, even though Apple Inc., Microsoft Corp. and other heavy companies reported quarterly results. The S&P 500 fell 3.3% this week, with trading volume rising to more than 24 billion shares on Wednesday, well above the average of 14.4 billion shares in the last 20 sessions. The CBOE volatility index closed above 30 points this week for the first time since early November.
A potential catalyst for further volatility could arise if hedge funds are forced to sell from positions to cover failed bets on missing sales, although it was unclear whether such a sale would be sufficient to create a broad equity risk.
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 that started this week’s battle with small retailers for GameStop Corp, said in a YouTube video on Friday that his company will no longer publish sales research in short.
Others said that the intensified activity of retail investors – which last year helped support rallies in the shares of Tesla Inc. and other names – could be, in itself, the latest sign of a market freeze.
“When you think of market bubbles, the last players to get 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 doubt that the recent cuts in GameStop and other names indicate a wider market bubble, noting that the size of the market – which measures the number of shares participating in a rally – remains healthy and credit markets are working “very well. ”.
“Maybe it’s time for a break” in the S&P 500 rally, the company said in a report on Friday.
Others, however, indicated potential market turmoil.
Stephen Suttmeier, technical research strategist at BofA Global Research, earlier this week urged clients to “take some profits” before February, a relatively weak month for equities.
Other worrying signs are the explosion of special purpose procurement companies or SPACs and the rise in the shares of electric vehicle companies following Tesla earnings, said Scott Schermerhorn, chief investment officer at Granite Investment Advisors.
However, he believes that the frenzy over GameStop and other actions is rather a “sidehow”.
Even after their rallies, the market capitalization of GameStop and other companies that have recently seen their stocks grow is “like a rounding error” compared to the larger market, he said.
Reporting by Lewis Krauskopf; Edited by Ira Iosebashvili and Jonathan Oatis