NEW YORK (Reuters) – Some investors are worried that wild swings in GameStop and other retailer-driven stocks could be new signs of over-exhaustion, predicting volatility for the broader stock market.
GameStop shares closed up 400% for the week after shares in the video game chain became a battleground between retailers and Wall Street professionals, a dispute that is captivating investors worldwide.
Some marketers see the huge gains, as well as the shift in American Airlines and other sharply shortened stocks, as a side event in a rally backed by the Federal Reserve, the expected spending on coronavirus relief and expectations that vaccines against COVID-19 The US economy recovered later this year.
Fed Chairman Jerome Powell earlier this week pushed back on proposals that the central bank’s very low interest rates and massive bond purchases create assets.
But the comments did not dampen investors’ concerns that the Fed’s monetary policy did not encourage excessive risk-taking across broader markets: the S&P 500 has risen 66% since March and equities are close to their highest valuations in two decades.
The actions in GameStop and other stocks certainly give us cause for concern, said James Ragan, director of wealth management research at DA Davidson. “You should at least consider that there is a chance of a market correction.”
The moves also showed comparisons to the Internet stock mania two decades earlier.
“Just the fact that you have a group of investors who are really chasing abnormal profits, that’s what reminds me of the dot-com bubble,” Ragan said.
Some barometers of general extravagance are already flickering: Citi said his ‘Panic / Euphoria’ model is in ‘increased euphoric territory’. And the latest survey by fund managers from BofA Global Research noted that the allocation to cash has declined rapidly, suggesting that investors are using more funds in riskier assets.
The wild trade on Wall Street dominated the news this week, even though Apple Inc, Microsoft Corp. and other corporate heavyweights reported quarterly results. The S&P 500 fell 3.3% for the week, and trading volume rose above 24 billion shares on Wednesday, well above the average of 14.4 billion in the past 20 sessions. The CBOE Volatility Index closed above 30 points for the first time since early November this week.
One possible catalyst for further volatility could come if hedge funds are forced to sell out positions to cover failed bets on short sales, although it was unclear whether there would be enough to create a wide risk for equities.
Some sham funds that have sold short seem to be changing their approach already. Short-seller Andrew Left, whose company Citron Research was one of the hedge funds that sparked this week’s battle with retailers over GameStop Corp, said in a YouTube video on Friday that his company would no longer publish short-selling research.
Others have said that the training activity of retail investors – which helped increase shares in Tesla Inc and other names last year – may in itself be the latest sign of froth in the market.
“When you think of market bubbles, the last players to jump on board are retail, and that’s generally what’s happening right now,” said Mike Mullaney, director of global market research at Boston Partners.
Analysts at LPL Financial doubt the recent rise in GameStop and other names, point to a broader market bubble and note that the market breadth – which measures how many shares participate in a rally – remains healthy and that the credit markets are functioning “just fine”.
‘Maybe it’s just time for a breather’ in the S&P 500 event, the firm said in a report on Friday.
However, others have pointed to possible turmoil in the market.
Stephen Suttmeier, technical research strategist at BofA Global Research, urged clients earlier this week to make some profit before February, a relatively weak month for equities.
Other concerns are the explosion of special-purpose acquisition companies, or SPACs, and the increase in shares of electric vehicle companies on the heels of Tesla’s profits, says Scott Schermerhorn, chief investment officer of Granite Investment Advisors.
Yet he believes the madness about GameStop and other stocks is rather a ‘by-show’.
Even after their marches, the market capitalization of GameStop and other companies that have seen their shares rise recently is ‘like a rounding error’ compared to the broader market, he said.
Reporting by Lewis Krauskopf; Edited by Ira Iosebashvili and Jonathan Oatis