By Saqib Iqbal Ahmed and Lewis Krauskopf
NEW YORK (Reuters) -Massive moves in stocks such as Kohl’s and Opendoor Technologies are raising questions over whether a new wave of meme stock trading is underway and what that signals about risk appetite more broadly.
Benchmark equity indexes have touched record highs, cryptocurrencies are rallying, and options trading volumes have jumped, highlighting renewed signs of speculative fervor across asset classes.
Much of the risk-taking behavior is being driven by retail market participants, investors said, with larger institutional players taking a more circumspect view.
“It seems like the story, at least in the equity market, is everything is kind of risk on,” Garrett DeSimone, head of quantitative research at OptionMetrics, said.
“It has gotten a bit frothy in that sense.”
So-called meme stocks – stocks that surge in price due to social media hype rather than company fundamentals – are at the forefront of this frothy market behavior.
Krispy Kreme and GoPro were among the companies riding the latest meme stock rally on Wednesday as retail traders latched on to the highly shorted names, a day after piling into the shares of department store company Kohl’s.
The Goldman Sachs Most Shorted Rolling Index, an equal-weighted basket of the 50 highest short-interest names in the Russell 3000 Index, is up 13% this month, compared to a nearly 2% gain for the Russell 3000 in that time, and is up over 60% since the low for the year in April.
“Retail has helped fuel the squeeze,” Marco Iachini, senior vice president of research at Vanda, said.
Retail interest was particularly on display in the options market with several retail favorite options names, including Krispy Kreme and Kohl’s, drawing massive trading volume.
“They also have a huge amount of mentions across retail boards and Reddit. So they’ve definitely attracted some attention, you know, not based on fundamentals, which I guess defines a meme stock,” OptionMetrics’ DeSimone said.
Trading in short-dated contracts has also surged, signaling higher appetite for risk-taking, options data showed.
Still, various options market gauges, including put-to-call ratios and stock correlation measures, point to frothiness but are not at highs seen at the peak of past periods of speculative frenzy.
“There is not the signal yet that things are so overbought that this needs to stop … to me it still feels early stage,” said Brent Kochuba, founder of options analytic service SpotGamma.
Speculative fever is on display also in cryptocurrencies and crypto-related stocks and exchange-traded funds.
Bitcoin, the world’s largest cryptocurrency, recently hit a record high of $123,153, while several crypto-focused stocks, including crypto exchange Coinbase Global and bitcoin stockpiler Strategy, formerly known as MicroStrategy, have soared.
“Confidence among retail traders is notably higher, fueled in part by recent gains in crypto markets,” Mark Hackett, chief market strategist at Nationwide, said in a note.
Irene Tunkel, chief U.S. equity strategist at BCA Research, said although retail investors appeared to be over-exuberant, the market as a whole did not.
“You look at institutional investor sentiment, it’s not really overextended,” Tunkel said. “So I think it’s just one group, which is retail investors, that got overly excited and the froth is there.”
Despite the S&P 500 making new highs, equity positioning is far below February levels as investors remain underweight stocks, according to Deutsche Bank estimates.
The S&P 500 as of Tuesday traded at 22.5 times its expected 12-month earnings – its highest level this year – and has been above a forward price-to-earnings ratio of 22 for nearly the past month, according to LSEG Datastream.
That is a valuation level the index has reached only about 7% of the time over the past 40 years, and is well above its long-term average of 15.8.
Investors say valuations are not always useful for determining the market’s near-term direction. But the fact that equity valuations are elevated could make stocks more vulnerable to any disappointing shocks in the coming weeks.
“For me, it’s more when positioning gets really crowded. So right now, we’re seeing these bouts of meme stock trading, but I’m not seeing it really affect the overall market,” Vanda’s Iachini said.
(Reporting by Saqib Iqbal Ahmed and Lewis Krauskopf; Additional reporting by Laura Matthews; editing by Megan Davies and Nia Williams)
Comments