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NEW YORK, Feb. 5 (Reuters) – As the stock rush in GameStop Corp shares and other social media favorites declines, investors are seeing signs of potential market stress that could weigh on the coming weeks’ greater share performance.
For the time being, US equities appear to be looking beyond the volatility increase that led the S&P 500 to its biggest weekly decline since October. Sturdy earnings, fiscal stimulus expectations and progress in nationwide vaccination efforts lead the equities to the everyday high.
The S&P 500 and Nasdaq set records for a second live session on Friday.
However, some investors are concerned that the game swing in GameStop and other “equity stocks” may exacerbate concerns about market volatility and increased valuations that could make market participants more risk averse. The S&P 500 stands at almost its highest price-to-earnings ratio in about two decades after being 74% higher than its lows in March.
“The recent retail activity has been important for the broader market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
According to BofA analysts, the liquidity of futures contracts on the S&P 500 has dried up as market makers and other investors wanted to reduce the risk during the GameStop boom. Earlier this week, ‘market fragility’, as measured by the bank, stood at its highest level since March 2020, making US equities extremely vulnerable to sudden market shocks, the firm said.
The movements in the Cboe Volatility Index, known as Wall Street’s “fear meter”, 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 Stuart Kaiser, UBS strategist, the climb in the fear meter was eight to ten points greater than the expected move after such a drop in the S&P 500. of the market due to negative developments.
The VIX has since fallen back to its lowest level since early December as U.S. equities rose this week. Nevertheless, “I would not say that we are still completely over,” 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 data on U.S. consumer prices.
Option markets have not let the green light flicker to continue with the resumption of risk.
According to Charlie McElligott, managing director of Nomura’s cross-asset macro strategy at Nomura, investor demand for the S&P 500, previously positioned in the index, has risen to a low of more than ten decades. The increase in demand indicates the risk of a downturn and bad trade in the next few weeks, he said.
In the long run, several market analysts say that the GameStop effect for the markets as a whole cannot just be a twist on the radar screen. A drop in the VIX of 20% or more to below 25 tends to be predicted, while the S&P 500 rises 2.6% a month later, according to Christopher Murphy, co-head of Susquehanna Financial Group’s derivative strategy.
The exuberance that magnifies the fault lines of the market has not yet completely faded. According to data from Trade Alert, option activity is showing strong demand for upward calls in the SPDR S&P Retail ETF, which includes GameStop, and the iShares Silver Trust, which was also ignored by retailers.
As a result, some investors say they plan to tread carefully for the time being, especially if they are exposed to passive funds that own a large number of small-cap stocks that could be susceptible to a sudden retail frenzy.
“Time will tell whether it has a lasting effect on the market,” said Matt Forester, chief investment officer of Lockwood Advisors at BNY Mellon. “We need to police our possessions to make sure we are not overly exposed to these trends.”
Reporting by April Joyner; Edited by Ira Iosebashvili, Nick Zieminski and Richard Chang