Are We Reaching Peak Irrationality?

The last 4 months on the market has seen some of the wildest swings in its history, but will this volatility and irrationality stick around for the long haul?

“When I see a bubble forming, I rush in to buy, adding fuel to the fire”.

George Soros

Since February, we have witnessed two historic events in stock market history. The first was the fastest bear market ever — from its all-time high on February 19, it took just 16 sessions for the S&P 500 (NYSEARCA:VOO) to fall 20%. It took only 6 more sessions to fall below 30%, before bottoming out at 34% on March 23. From there, we got to see the greatest 50-day rally in the history of the market, with the index returning 37.7%.

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What was so fascinating about this rally was that it caught many institutional investors on the back foot. Famed investor Stanley Druckenmiller came out this week rueing his cautiousness as the market soared: “I was up 2% the day of the bottom, and I’ve made all of 3% in the 40% rally…I missed a great opportunity here. Won’t be the last time.” What caught some of Wall Street’s stalwarts so off-guard was the seeming irrationality of the rally (an irration-ally if you will). While the speed of the dip lent itself to a bounce of the dead-cat variety, everyone was expecting it to come back down to earth. Everyone except small-time traders and retail investors, who dove in at the bottom and have been handsomely rewarded.  

Speculation is rife

In a week which saw all-time highs for companies like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), and Tesla (NASDAQ:TSLA), my attention has somehow been drawn away from these record feats. Instead, I’ve been scratching my head looking at companies at the other end of the spectrum. 

Companies like Hertz (NYSE:HTZ), that filed for Chapter 11 last week and has since seen a pump-and-dump for the ages. Or Luckin Coffee (NASDAQ:LK), which in the two weeks after Nasdaq announced it would be delisted from the exchange grew almost 300%. Or even Chesapeake Energy (NYSE:CHK), which jumped 350% in the space of Friday’s opening and the bell on Monday. On Tuesday, Chesapeake stock was halted after reports came out that it was planning to file for bankruptcy. 

Let’s put this into perspective: the three largest companies on the U.S. stock exchange have all hit record highs this week and yet the more interesting conversation is about the performance of three companies who may not exist this time next year. It is strange times we have found ourselves in. To give us some context of how this can occur, take a look at the following chart from Carl Qunitanilla via jkrinskypga on Twitter: 

Commission-free trading has made the stock market more accessible than it’s ever been. This is an amazing thing. The stock market is the greatest wealth creation tool most people will ever have access to and the fact that it is no longer controlled by the elite few is a great equalizer. 

However, now that people are trading more than ever, it has made the stock market more unpredictable than ever — in the short term. For every long-term investor with a solid investment strategy, there are three short-term traders looking for a quick payday. When you look at the short-term bubbles of Hertz and Chesapeake, always remember that for every investor who made a killing buying at the bottom, there is someone who lost one by buying at the top. 

In case you missed it: 

I’ll sign off with one piece of advice every investor should keep in their mind: don’t buy bankrupt companies.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.