While we look around for reasons why the market is still going up, speculative traders are both causing and cashing in on the unexpected rally.
It’s no secret that the market’s recent rally has left a few people scratching their heads. While institutional investors, the ‘smart money’, turned bearish and moved away from equities in the face of an economic Black Swan we have never seen the extent of before, retail investors rushed in to fill the gap and came out with some big paydays. And if it wasn’t clear enough already, it was a big rush. Online brokerages like Charles Schwab (NYSE:SCHW), TD Ameritrade (NASDAQ:AMTD), ETrade (NASDAQ:ETFC), and Robinhood saw new accounts spike up to 170% in the last quarter.
The greatest 50-day period in the history of the S&P 500 (NYSEARCA:VOO) was commandeered not by the ‘smart money’, but by retail investors. In a joke you’ve seen repeated at least a hundred times by now, Robinhood really is living up to its name. And while this buy-the-dip mentality, strengthened by Fed stimulus and low-interest rates, has enriched millions of small-time investors, it has also created levels of speculation not seen since the dot-com bubble. This tweet from Sentimentrader shows the extent to which retail investors are buying call options.
This is stunning.
At the peak of speculative fervor in February, small traders bought to open 7.5 million call contracts.
This week, they bought 12.1 million.
Watch what people do, not what they say. They’re full-bore bullish, on steroids. pic.twitter.com/T1v74xq1Of
— SentimenTrader (@sentimentrader) June 6, 2020
What is the fallout of this speculation?
Absolutely nothing. Yet.
People are betting in their millions on the short-term success of securities and they’re making a fortune doing it. Initially, so much of the market’s rally centered around the big tech stocks of Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), and Google (NASDA:GOOG) due to their relative safety and lack of alternatives. Yet as lockdown restrictions begin to alleviate, investors are now looking to those industries that were most affected in search of a bargain. Let’s take a look at the recent performance of some of these stocks over the past 5 days of trading:
- American Airlines (NASDAQ:AAL) is up 72%
- Norwegian Cruiselines (NYSE:NCLH) is up 41%
- Tripadvisor (NASDAQ:TRIP) is up 31%
- MGM Resorts (NYSE:MGM) is up 26%
While it is a long-standing investment strategy to buy-the-dip once stocks become oversold in hopes of a quick turnaround, the scale at which investors are buying distressed businesses is a worrying sign. Just one week ago, American Airlines announced plans to cut 30% of its management staff. With questions over how the future of air travel will look, whether social distancing can be successfully enforced on planes, and the inevitable reduced demand in business travel, for American to only be 36% down for the year raises a multitude of questions. Some of them answered by its position as Robinhood users’ third most-owned stock.
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For an even starker example of the prevalence of the current short-term mindset of investors right now, check out Hertz (NYSE:HTZ). Up 221% since Thursday – and set to open up ~30% today – the company is in the middle of filing for bankruptcy, with a very real chance of the stock going to zero.
Perhaps Hertz will be our shoe-shine boy moment, a jolt to the system that brings us back down to Earth. I hope so.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.