The market reacted visciously to the onset of Covid-19 where in March 2020 the US market saw one of the fastest declines into bear market since the 1920s.
Since then it also saw one of the fastest recoveries where the Nasdaq returned to its pre-Covid level barely 3 month later in June 2020. It is one of the only market which actually experienced a V recovery. The other major US markets like the S&P 500 (SPY stock) lagged the tech heavy Nasdaq and put the rest of the global equity markets to shame.
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It is obvious the market sentiment is now getting out of hand as the recovery in the stocks has been led by retail investors driven by greed. We saw retail leading the last tech bubble and the current froth is giving us the same vibes.
We have collected some charts which shows the current excess and think investors should be cautious out there especially as the virus is still not under control. There is a real risk it will get worse as the individual states are trying to open up as quick as possible. This in our view is a disaster waiting to happen.
Stock Market Bubble Funded By Stimulous Checks?
Retail investors unable to gamble on sports seems to migrated to the stock market. Robinhood, a broker with no trading cost has enable easy access for retail investors to the market where buying a few shares of Amazon is easy as ordering off Amazon.
Tech Bubble 2.0 Here We Come
The volume of shares traded on the Nasdaq is at its highest since the financial crisis.
It seems the retail capital have bifurcated towards low priced stocks, preferably near bankruptcy to get the maximum juice and market leaders like the tech sector, pushing it ever higher.
Another avenue is buying low price call options which are strikes massively out of money. This has a tendency to feed of it self options push up underlying stock prices which force market makers whom sold the option to keep buying as part of their delta hedging strategy.
US Market Sentiment
Similarly the market sentiment is abit too frothy for our liking where bulls think the party will last forever. The current level of sentiment is approachomg extreme levels where it is a early warning for market falls.
We disagree that the future returns of the market will be the same as what we saw in the last 3 months. Given where we are trading today and high expectations of rapid recovery it looks like a major fall is coming later in the year.
Stay safe out there.