(Updates with Friday’s trading close, add details on VIX performance history)
NEW YORK, February 5 (Reuters) – As the frenzy of trading with GameStop Corp shares and other social media favorites subsides, investors are seeing signs of potential market stress that could affect stock performance in the coming years. weeks.
For now, US stocks appear to be looking beyond last week’s increased volatility, which has led the S&P 500 to its biggest weekly decline since October. Solid profits, expectations of fiscal stimulus and progress in vaccination efforts across the country are taking actions back to historic levels.
The S&P 500 and Nasdaq set records for the second consecutive session on Friday.
Some investors, however, fear that the violent swings in GameStop and other “meme stocks” may have exacerbated concerns about market volatility and high valuations that could make market participants more risk-averse. The S&P 500 is close to its highest price / earnings ratio in about two decades, after rising 74% from March lows.
“The recent retail activity has been worrying for the broader market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
Liquidity in S&P 500 futures dried up as market makers and other investors sought to reduce risk during the GameStop boom, according to BofA analysts. Earlier this week, the “market weakness”, as measured by the bank, reached its highest level since March 2020, making U.S. stocks exceptionally vulnerable to sudden market shocks, the company said.
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 normal. On January 27, the index rose 14 points, its biggest one-day gain since March, with the S&P 500 losing 2.6%.
The fear meter’s rise was eight to 10 points higher than the expected move after the S&P 500 crash, according to UBS strategist Stuart Kaiser. The overreaction, he said, points to increased nervousness among investors, which may suggest higher market sales in response to negative events.
The VIX has since reverted to its lowest level since early December, with US stocks rising this week. Even so, “I wouldn’t say that we have completely overcome this,” said Kaiser.
Next week, investors will focus on quarterly corporate results from Cisco Systems Inc, General Motors Co and Walt Disney Co, as well as consumer price data in the U.S.
The options markets did not give the green light to move at full speed with the resumption of risk.
Investor demand for S&P 500 call options, used to make gains on the index, jumped after falling to several decades earlier this week, according to Charlie McElligott, managing director of cross-asset macro strategy at Nomura. The fluctuation in demand points to the risk of a downturn and unstable trade in the coming weeks, he said.
In the long run, several market analysts say the GameStop effect may be nothing more than a signal on the radar screen for markets as a whole. VIX drops of 20% or more to below 25 tend to bode well for stocks, with the S&P 500 rising 2.6% a month later, according to Christopher Murphy, Susquehanna’s co-director of derivatives strategy Financial Group.
Even so, the exuberance that amplified the market’s failures has not completely disappeared. According to data from Trade Alert, options activity shows strong demand for bullish calls on the ETF SPDR S&P Retail, which includes GameStop, and the iShares Silver Trust, which was also shaken by retail trade.
As a result, some investors say they plan to act cautiously for the time being, especially if they are exposed to passive funds that hold a large number of small-cap stocks that may be sensitive to a sudden retail frenzy.
“Time will tell if this has a more lasting effect on the market,” said Matt Forester, investment director at Lockwood Advisors at BNY Mellon. “We need to police our properties to ensure that we are not overly exposed to these trends.”
April Joyner reporting; Editing by Ira Iosebashvili, Nick Zieminski and Richard Chang