Photographer: Kiyoshi Ota / Bloomberg
Photographer: Kiyoshi Ota / Bloomberg
Like a slot machine that pays with every pull, the most reliable bets on the stock market lately have been the most risky.
Buy a company that sounds like something Elon Musk mentioned in a tweet (but it was not)? Signal Advance Inc. has fired 12 times. Lend money to a software maker to buy Bitcoin? Microstrategy Inc. the convertible bond goes up 50% in four weeks (the option is in the money). Support optimistic options after the Nasdaq 100 doubled in 24 months? Wednesday was the fourth busiest day ever for US call negotiations (the other three were last year).
Throw a javelin and hit a winner, it seems. Encouraged by the Federal Reserve’s stimulus, vaccines and the psychological conditioning that comes when no bad phase lasts, everyone, from retail novices to institutional managers, is racing to profit from the 10-month meltdown. Of course, it is possible that all this can continue for weeks, if not months, without much or even a small reversal. Predicting exactly when these fevers will subside is an almost impossible task. But Bubble warnings are starting to sound from every corner.
“It’s a total craze, and the bull’s relative youth doesn’t make it ‘safer’ to get on board,” wrote Doug Ramsey, Leuthold Group’s chief investment officer, in a January 8 customer report – which went on to note that your company is also among the buyers. “We are just as guilty as the others for pursuing this impulse”
Chasing is working. Four days after ending the year with almost 40 times earnings, the Nasdaq 100 index registered its biggest rise in two months. Hedging against stocks, on the other hand, has been expensive. A basket of managers’ favorite short positions went up against them by 10% last week, rising more in seven months. Waiting for the mania to disappear is also proving useless. The frenzy over special-purpose acquisition companies continued, with a new dozen IPO filings on Friday, including one with the ticker “LOL.”
“Too much foam, too much complacency,” said Matt Maley, chief market strategist at Miller Tabak + Co., who thought last week’s show in Washington would have at least slowed the frenzy. “After an increase of 16% in just two months and 70% since March, this news should have brought the market down. A 10% -15% correction would be normal and healthy. “
Tesla Inc.’s ability to add 25% to a market value of nearly $ 700 billion in five days made headlines last week, but, in truth, the options market was the place to look. Call options expired on January 15 with a strike price of $ 1,000, the most traded Tesla option on Friday, quintupled on Friday, ending the week at $ 9.15 after starting at 53 cents each.
The individuals appear to be leading the action, according to JPMorgan Chase & Co., which cited a proxy for the NYSE margin account data indicating a potentially strong recovery in December from previous months. Purchasing options from small traders fell sharply after a seasonal decline in the last week of December, as did retail-oriented off-the-shelf trading, the bank said.
“The liquidity strength seems to be reverberating once again intensely through retail investors, in a repeat of the second quarter of last year,” wrote strategists led by Nikolaos Panigirtzoglou in a note on Friday. “Given the expectation of more fiscal support, it is likely that this strength will be maintained in the coming weeks.”
The industry realized this. Cboe Global Markets Inc. has been customizing products for smaller investors. He updated the options in the mini S&P Index to increase liquidity and provide better execution for retail customers after, in June, saying he would revive a mini-VIX product intended, at least partially, for smaller traders.
The company tried to “make some products that respond to these changes in investor demand, which we believe are here to stay,” said Arianne Criqui, head of derivatives and global customer service at Cboe, in an interview in November. She noticed that Robinhood Markets Inc. says that only about a fifth of its clients trade options. “We see great advantages” for more people to start, she said.
Jason Goepfert, of Sundial Capital Research, has been raising flags since the end of December on the great strength that retail traders exert 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 54% stake against 28% for the largest ones.
“It looks like it got even worse,” wrote Goepfert in a note on Tuesday. “The most reliable sentiment measures tend to be those that focus on real money and leveraged instruments. That’s when emotion has the greatest impact. When we look at some of the most leveraged vehicles available to investors, there is widespread evidence of extreme speculation. “
The market is ready for a race for riskier stakes, as many assets, such as cash and bonds, are offering historically depressed yields. Some investors resorted to stocks – and options – to generate revenue that is missing from almost everything else. Chris Murphy, derivative strategist at Susquehanna, noticed in November, this substitution “can be a great way to increase yields”, given the combination of high volatility and high valuations.
Andy Nybo, of Burton-Taylor International Consulting LLC, also sees the pursuit of income contributing to the frenzy of options.
“With bond yields at zero or very low rates, there are a lot of investors looking to increase yields,” he said in an interview in October. “Options are a powerful tool not only for gaining exposure, but also for earning income for existing holders. Therefore, substitution strategies, call writing strategies are useful tools for investors to earn income, as well as to manage their exposure to risk, both on the positive and negative sides ”.
To say that there is foam on the sidelines is not the same as saying that everything is doomed. In a note last week, Bank of America strategists tried to trace all the signs that point to a bear market in broader equity measures, and found that 63% of them were served. Among them are decreasing money in fund holdings, a rise in the Cboe Volatility Index and fluctuating consumer sentiment. Although the reading reached a three-month high, it falls short of the peak level of 79% seen in September 2018.
“Our checklist of bearish market signals (signals normally triggered before a market peak in the S&P 500) has grown increasingly bearish,” wrote strategists led by Savita Subramanian. “Our The 2021 forecast requires muted returns from the S&P 500 ”.
– With the help of Sarah Ponczek