Market Update – Speculation is Back!

June 3, 2024

“The meme-stock craze has been given another revival after the Reddit account that drove the mania in 2021 posted what appeared to be a $116 million position in GameStop. A?screenshot by Keith Gill,?known on X as?Roaring Kitty, showing the position and accompanying call options couldn’t be verified. Still, that didn’t prevent?GameStop shares from more than doubling in premarket trading.”

The MEME stock frenzy (part 2) kicked off on May 13 when Keith "Roaring Kitty" Gill, credited with kickstarting the original meme stock mania, returned to X on May 12 with a tweet showing a picture of a man leaning forward in a chair. That precipitated an immediate spike in GameStop stock, which in turn seemed to drag AMC shares up, along with several other MEME stocks.

?The MEME stock trade is but one sign of the speculative froth on the markets.? According to research produced by Professors Federico Bandi and Nicola Fusari at Johns Hopkins’ Carey Business School, within the S&P 500, daily transaction volume in so-called “Zero Days to Expiration” options (0DTE) averaged 43% of overall daily option volume during 2023.

According to TipRanks, the daily notional value of 0DTE options is now close to $1 trillion, and trading volume has doubled since 2021.

According to the Financial Times, the 1-month rolling sum of retail net purchases of leveraged equity ETFs surged to nearly $6 billion as of mid-May:

We also see that penny stock trading is booming, with seven of the top 10 most traded US equities in May being penny stocks worth less than $1:

The "Magnificent 7" — Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA) and Meta Platforms (META) — have been driving the market rally this year on artificial intelligence (AI) craze… According to the latest report from Goldman Sach’s prime brokerage, Magnificent 7 companies account for about 20.7% of hedge funds’ total U.S. single stock net exposure. This represents the highest level on the record and exceeds the previous peak level of 20% seen last summer…Further, the Magnificent 7 hit 31% weighting in the S&P 500.

Source: Yahoo Finance, 5/30/24

How does this end?? If history is any guide, the old axiom of “escalator up, elevator down” comes to mind.? Momentum trading pulls money into the trade, and the trade can go higher and longer than what seems reasonable, but it usually reaches a point where the last dollar wanting in on the trade is the peak.? Time will tell – hindsight always shows the obvious – so we will just have to see how this plays out.

Should you wish to engage in further discussion or have any questions, please let me know.