Photographer: Kiyoshi Ota / Bloomberg
Photographer: Kiyoshi Ota / Bloomberg
Like a slot machine that pays off every time, the most reliable bets on the stock market were the most risky.
Long run a company that sounds like something Elon Musk mentioned a tweet (but was not)? Signal Advance Inc. has risen only 12 times. Lend money to a software manufacturer to buy Bitcoin? A Microstrategy Inc. The convertible effect is 50% higher within four weeks (the option is the money). Does the truck back up with bullish options after the Nasdaq 100 doubled in 24 months? Wednesday was the fourth busiest day ever for call trading in the US (the other three were last year).
Throw an arrow, hit a winner, this is what it looks like lately. Reinforced by stimulating the Federal Reserve, vaccines and the psychological state that arises when there is no bad plastering, everyone, from retailers to institutional managers, rushes in money for the ten-month-old melting point. Of course, it is possible that this can continue for weeks, if not months, without reversing so much or even a little. Predicting exactly when such a fever is going to break is an almost impossible task. But bubble warnings start blowing from every nook and cranny.
“This is a full-blown mania, and the relative youth of the bull does not make it ‘safer’ to get on board,” Doug Ramsey, chief investment officer of Leuthold Group, wrote in a January 8 report to clients. note that his firm was also among the buyers. “We are just as guilty as the others of pursuing this momentum.”
Chasing it works. The Nasdaq 100 index reached its biggest rally in two months four years after the year ended nearly 40 times earnings. In contrast, hedging against equities was expensive. A basket of favorite positions for executives was up 10% last week, rising the most in seven months. To hope that the mania disappears is also useless. The frenzy over special-purpose companies has continued, with a new dozen making an IPO filing on Friday, including one with the check mark “LMGA. “
“Too much foam, too much complacency,” said Matt Maley, chief market strategist at Miller Tobacco + Co., who thought the show in Washington last week would at least have slowed the madness. “After a 16% period in just two months and a 70% period since March, the news should have dropped the market. A correction of 10% -15% will be normal and healthy. ‘
The capability of Tesla Inc. adding 25% over five days to a market value of nearly $ 700 billion over five days made headlines last week, but for the real foam, the options market was the best place. Calls expiring on January 15, with a strike price of $ 1,000, the most traded Tesla option on Friday, doubled five times on Friday and ended the week at $ 9.15 after starting at 53 cents each.
According to JPMorgan Chase & Co., individuals appear to be driving the action, citing a proxy for data from the NYSE margin account, indicating a possible strong pick-up in December compared to previous months. Buying retailers’ buying options fell sharply after a seasonal decline in the last week of December, as did retail-oriented foreign exchange trading, the bank said.
“The liquidity power seems to be echoing in an intense way via retail investors in a repeat of the second quarter of last year,” strategists led by Nikolaos Panigirtzoglou wrote in a note on Friday. “Given the expectation of further fiscal support, this power is likely to be sustained in the coming weeks.”
The industry has taken note of this. Cboe Global Markets Inc. adapt products to smaller investors. It has refreshed mini-S&P index options to improve liquidity and provide better execution to retail customers, after saying in June that it would revive a mini-VIX product aimed at at least in part at smaller retailers.
The firm has tried to ” make some products that take into account these changes in investor demand, which we believe are here to stay ”, Arianne Criqui, Head of Derivatives and Global Customer Services, said in November. said an interview. His noticed that Robinhood Markets Inc. only about a fifth of its customers’ trading options say so. “We’re seeing a good head start” for more people to get started, she said.
Sundial Capital Research, Jason Goepfert, has been raising flags since late December about how much power retailers have in the options market. He cited data on the number of call purchases and the money spent on them – where the smallest participants had a share of 54% compared to the largest for 28%.
“With the appearance of things, it got even worse,” Goepfert wrote in a note Tuesday. ‘The most reliable sentiment measures are usually those that focus on real money and leverage instruments. This is when emotion has the greatest impact. If we look at some of the most leveraged vehicles available to investors, there is widespread evidence of extreme speculation. ”
The market is very important for a risky investment, as many assets such as cash and bonds offer historically printed returns. Some investors have turned to stocks and options to generate the income that almost all the others lack. Chris Murphy, a derivative strategist at Susquehanna, noticed in November that overwriting ‘could be an excellent way to increase returns” given the combination of increased volatility and high valuations.
Andy Nybo of Burton-Taylor International Consulting LLC also sees the pursuit of returns contributing to the option frenzy.
“With bond yields at a low or very low rate, there are a whole bunch of investors looking for yield improvement,” he said in an interview in October. ‘Options are not only a powerful tool for gaining exposure, but also a tool to earn returns for existing holders. Strategies for overwriting, call writing are therefore a useful tool for investors to earn returns, as well as to manage their risk exposure upside down or adversely. ”
To say that there is foam at the edge is not the same as saying that everything is doomed. In a note last week, Bank of America strategists tried to draw all the signals pointing to a bear market to a broader benchmark of equities, and found 63% of them had been reached. Among them is languishing cash in funds, an increase in the Cboe volatility index and live consumer sentiment. Although the reading reached a three-month high, it is less than the 79% high in September 2018.
“Our checklist of signposts on the market (signals normally activated before an S&P 500 market peak) has become increasingly clumsy,” writes Savita Subramanian strategist. ‘We The 2021 forecast calls for muted S&P 500 returns. ”
– With the help of Sarah Ponczek