For Small Investors, the Surge in Volatility Is a Warning Sign
What’s been billed as Occupy Wall Street 2.0 seems more than that, although Robinhood’s band of merry men and women started the surge, probably staked with some of the $900 billion from the fiscal relief enacted at the end of 2020. According to Jefferies economists Aneta Markowska and Thomas Simons, Uncle Sam direct-deposited $160 billion in their accounts in January.
“The stimulus checks and continued lockdowns probably played a role: ‘Idle minds are the devil’s playground,’” Doug Ramsey, chief investment officer at Leuthold Group, writes in an email.
But it appears institutional investors have gotten on the bandwagon. One astute Barron’s reader pointed out large block trades of 50,000 shares of
(ticker: GME) at $335 per share, worth $16.75 million on Friday, not exactly what would be going through zero-commission retail brokers, even after restrictions on that name and others were loosened.
While the heavily shorted stocks soared in the past week, the overall market suffered its worst week since the end of October. According to Dow Jones’ superb statistics team, the 100 most heavily shorted stocks averaged a gain of 22.6% over the past week and 70.1% year to date. The
Dow Jones Industrial Average,
were clipped by 3.3% to 3.5% for the week, leaving them down 1.1% to 2% for the month.
Perhaps the biggest factor in the wild week was the sharp rebound in volatility. The
Cboe Volatility Index,
or VIX, ended the week at 33, half again higher than where it started. The rise in the market’s so-called fear gauge both reflects increased risk aversion and forces leveraged portfolios to pull back under so-called value-at-risk criteria.
For individual investors, the surge in volatility and trading volumes presents warning signs. “One of the surest signs that a bubble is close to bursting is when the retail investor piles in with leverage. And if the retail warrior millennial mob are angry now, wait until they lose their shirts in any market collapse,” writes Albert Edwards,
provocatively bearish strategist.
Indeed, sharp reversals were seen on Thursday when trading in this cohort of stocks targeted by the Reddit rebels elicited protests that extended to Washington, D.C. Both extremes of the political spectrum, from Rep. Alexandra Occasio-Cortez (D., N.Y.) on the left to Sen. Ted Cruz (R., Tex.) on the right, complained of the unfairness of restricting individual traders while big institutions had no curbs.
The bigger danger isn’t that individuals are plunging too deeply into the market, but that they could pull back, says J.P. Morgan’s global quantitative and derivatives strategy team, led by Nikolaos Panigirtzoglou.
“In our opinion, the market implication from this week’s events is not arising from the short covering on certain small stocks or potential losses inflicted on certain hedge funds, but more from a potential slowing of the overall retail flow that had been an important driver of the risk market rally since November. The sharp rise in volatility and margin requirements for stocks popular with retail investors could inflict losses on the same retail investors that have been profiting from the positive momentum of the previous weeks,” they wrote in a client note on Friday.
All of which suggests the surge in the trading of these small, speculative stocks is not over. Peaks in trading volumes, and the peak in euphoric sentiment, usually precede the ultimate peak in the market by a few months, Leuthold’s Ramsey observes. That’s not his forecast, he’s quick to add, but what the historical record says. And the history of bubbles is a long one.
Read more Up And Down Wall Street: WallStreetBets May Be Unique, but That Doesn’t Mean It’s Not a Bubble
Write to Randall W. Forsyth at [email protected]
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Dow Jones – For Small Investors, the Surge in Volatility Is a Warning Sign