NEW YORK (Reuters) – Some investors are worried that GameStop’s wild swings and other short-term trader-driven actions could be new signs of overexuberance that portend the volatility of the wider stock market.
GameStop shares closed up 400% during the week after the video game chain’s shares became a battleground between Wall Street retailers and professionals, a conflict that captivated investors around the world.
Some market watchers see these massive gains, as well as the movements of American Airlines and other very small stocks, such as a side show in a rally backed by Federal Reserve support, anticipated the relief costs of the coronavirus and expectations that COVID-19 vaccines will help The U.S. economy rebounded later this year.
Fed Chairman Jerome Powell earlier this week withdrew suggestions that super low central bank interest rates and massive bond purchases were creating asset bubbles.
But those comments failed to calm some investors’ concerns that the Fed’s monetary policy has encouraged excessive risk-taking in wider markets: the S&P 500 has risen 66% since March and stocks are close. of its highest valuations in two decades.
The action on GameStop and other actions “definitely raises concerns for us,” said James Ragan, DA Davidson’s director of wealth management research. “At the very least, you have to consider that there is a possibility of a market correction.”
The moves also made some comparisons to the mania for actions on the Internet two decades earlier.
“Just the fact that you have a group of investors who are really chasing abnormal gains, that’s what the dot-com bubble reminds you of,” Ragan said.
Some general overexuberance barometers are already blinking: Citi said his “Panic / Euphoria” model is in “high euphoric territory.” And the latest BofA Global Research fund manager survey noted that cash allocations had fallen rapidly, indicating that investors are allocating more funds to riskier assets.
The frantic trade dominated the news on Wall Street this week, even as Apple Inc., Microsoft Corp. and other corporate heavyweights reported quarterly results. The S&P 500 fell 3.3% during the week, with a transaction volume of 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 this week above 30 points for the first time since early November.
A potential catalyst for greater volatility could come if hedge funds are forced to sell out of positions to hedge failed short selling bets, although it was unclear whether that would be enough to create broad risk for the actions.
Some short selling hedge funds seemed to be already changing their approach. Short salesman Andrew Left, whose company Citron Research was one of the hedge funds that sparked this week’s battle with short-term retailers on GameStop Corp, said Friday in a YouTube video that the your company would stop publishing research on short-term sales.
Others said the rise in retail investor activity (which last year helped boost concentrations in shares of Tesla Inc. and other names) could be, in itself, the latest sign of market fraternity.
“When you think about market bubbles, the last players to engage in the market are retailers, and that’s what’s happening right now,” said Mike Mullaney, director of global market research at Boston Partners.
LPL Financial analysts doubt the recent reductions in GameStop and other names indicating a wider market bubble, noting that the breadth of the market (which measures the number of shares participating in a rally) it remains healthy and credit markets are working “well”.
“Maybe it’s just time for a break” at the S&P 500 rally, the firm said in a report Friday.
Others, however, pointed to the possible market turmoil.
Stephen Suttmeier, technical research strategist at BofA Global Research, earlier this week urged clients to “pull out some profits” before February, a comparatively weak month for equities.
Other worrying signs are the explosion of special-purpose acquisition companies, or SPACs, and the rise in shares of electric vehicle companies following Tesla’s gains, said Scott Schermerhorn, Granite’s chief investment officer. Investment Advisors.
Still, he believes the frenzy over GameStop and other actions is more of a “side show.”
Even after their mergers, the market capitalization of GameStop and other companies that have recently seen their shares rise are “like a rounding error” compared to the wider market, he said.
Reports by Lewis Krauskopf; Edited by Ira Iosebashvili and Jonathan Oatis