NEW YORK (Reuters) – As the trading frenzy in the shares of GameStop Corp and other social media favorites eases, investors are seeing signs of potential market stress that could affect broader stock performance in the next few weeks.
For now, US equities appear to be outpacing last week’s rise in volatility that led the S&P 500 to its biggest weekly decline since October. Solid gains, fiscal stimulus expectations, and progress in vaccination efforts across the country bring stocks back to record highs.
The S&P 500 and Nasdaq set records for a second straight session on Friday.
However, some investors are concerned that wild variations of GameStop and other “meme stocks” may exacerbate 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 reaching 74% from its March lows.
“Recent retail activity was worrisome for the wider market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
According to BofA analysts, the liquidity in futures of the S&P 500 dried up as market makers and other investors tried to reduce risk during the rise of GameStop. Earlier this week, the “market fragility” as measured by the bank peaked at its highest level since March 2020, making US stocks exceptionally vulnerable to sudden shocks. market, said the firm.
Movements in the Cboe volatility index, known as Wall Street’s “fear indicator,” also indicate that investors may be more sensitive to market turmoil than usual. On January 27, the index rose 14 points, its biggest one-day gain since March, as the S&P 500 lost 2.6%.
According to UBS strategist Stuart Kaiser Stuart Kaiser, the rise in the fear gauge was eight to ten points higher than the forecast after a fall in the S&P 500. The oversized reaction, he said, points to sharp nerves among investors who might suggest larger market sales in response to the negative trend.
Since then, the VIX has returned to its lowest level since early December, as US equities have rallied this week. Still, “I wouldn’t say we’ve gone through it completely,” 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 consumer price data in the US.
Option markets have not given the green light to move at full speed and resume risk.
Investment demand for calls to the S&P 500, which used to be on the index, has jumped after falling to a low of several decades earlier in the week, according to CEO Charlie McElligott , macro-asset strategy between Nomura. Growing demand points to the risk of a setback and bewilderment in the coming weeks, he said. In the long run, several market analysts say the GameStop effect can only be a glance at the radar screen for the market as a whole. VIX falls of 20% or more to below 25 tend to portend stocks, with the S&P 500 rising 2.6% a month later, according to Christopher Murphy, co-head of the group’s derivatives strategy financial Susquehanna.
However, the exuberance that increased the market failure lines has not completely faded. According to Trade Alert data, the options activity shows a high demand for upward calls on the SPDR S&P Retail ETF, which includes GameStop, and the iShares Silver Trust, which was also influenced by trade in the detail. As a result, some investors say they plan to walk cautiously at the moment, especially if they are exposed to passive funds that contain a large number of small-cap stocks that could be sensitive to a sudden retail frenzy. “Time will tell if this has a more lasting effect on the market,” said Matt Forester, investment director at Lockwood Advisors for BNY Mellon. “We need to monitor our stakes to make sure we are not overly exposed to these trends.”
April Joyner Reports; Edited by Ira Iosebashvili, Nick Zieminski and Richard Chang