GameStop frenzy reveals potential for broader market stress By Reuters
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NEW YORK (Reuters) – As a trading frenzy in GameStop Corp. (NYSE 🙂 Stocks and other social media favorites are falling, investors are watching signs of potential market stress that could weigh on overall stock performance for the coming weeks.
For now, US stocks appear to be looking beyond last week’s surge in volatility, which resulted in the largest weekly decline since October. Solid earnings, fiscal economic sentiment, and progress in nationwide vaccination efforts are bringing stocks back to all-time highs.
The S&P 500 and Nasdaq posted records for a second straight session on Friday.
However, some investors fear that the wild swings in GameStop and other “meme stocks” may have heightened concerns about market volatility and increased valuations, which could make market participants more risk averse. The S&P 500 is near its highest price / earnings ratio in roughly two decades, after rising 74% from its March lows.
“The recent retail activity has been to the broader market,” said Benjamin Bowler, director of global research for equity derivatives at BofA Global Research.
According to BofA analysts, the liquidity of the futures on the S&P 500 dried up as market makers and other investors tried to reduce risk during the GameStop surge. Earlier this week, the bank’s “market fragility” measurement was at its highest level since March 2020, making US stocks extremely vulnerable to sudden market shocks, the company said.
Movements in the Cboe Volatility Index, known as Wall Street’s “fear measure,” also suggest that investors may be more sensitive than usual to market turmoil. On January 27, the index rose 14 points, the largest daily gain since March, when the S&P 500 lost 2.6%.
According to Stuart Kaiser, strategist at UBS, the rise in the fear knife after such a fall in the S&P 500 was eight to 10 points higher than expected. The oversized reaction suggests heightened unrest among investors, which could point to larger market selling in response to negative developments.
It has since returned to its lowest level since early December, when US stocks rallied this week. Still, “I wouldn’t say we haven’t made it yet,” said Kaiser.
Next week, investors will focus on the quarterly corporate results of Cisco Systems Inc (NASDAQ :), General Motors Co (NYSE 🙂 and Walt Disney (NYSE 🙂 Co and US consumer price data.
The options markets have not given the green light to resume risk.
According to Charlie McElligott, managing director, cross-asset macro strategy at Nomura, investor demand for calls for the S&P 500, which was used to position for index gains, has increased after dropping to multi-year lows earlier this week was. The surge in demand points to the risk of pullback and troubled trading over the next few weeks, he said. In the long term, several market analysts say that the GameStop effect for the markets as a whole can only be a slip on the radar screen. A decline in the VIX from 20% or more to below 25 is usually a good sign for stocks. The S&P 500 was up 2.6% a month later, according to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
Still, the exuberance that magnified the market’s fault lines has not completely faded. According to Trade Alert, options activity shows strong demand for upside calls in the SPDR S&P Retail (NYSE 🙂 ETF, which owns GameStop, and the iShares Silver Trust (NYSE :), which has also been rocked by retail. As a result, some investors say they are proceeding cautiously for the time being, especially if exposed to passive funds that hold large numbers of small-cap stocks that could be sensitive to a sudden retail frenzy. “Time will tell if this has a more lasting impact on the market,” said Matt Forester, chief investment officer of BNY Mellon (NYSE :), Lockwood Advisors. “We need to monitor our stocks to make sure we are not overly exposed to these trends.”