Following the market these days brings to mind the Yiddish expression, “The problem is that the bride is too pretty.” That’s because making money has become too easy and investors too sure the market will continue in its winning ways. Investing is not supposed to be so easy and in the past frothy markets like this one have sometimes been followed by very painful declines. So what lies ahead? Will the party continue or is a sharp decline in the making?
Analysts have been warning about the market’s high valuations for several months and the following are a few of them.
On December 1, advisor Knowledge Leaders Capital noted that the market’s extreme euphoria has surpassed even that of the dot-com bubble.
On December 2, Citi Chief Economist Tobias Levkovich said, “There is now a 100% historical probability of down markets... in the next 12 months.”
And just several days later, on December 6, JP Morgan called euphoria the biggest threat to the market. Other well-known firms have expressed very similar views before and after these warnings. However, the market is shrugging off all pleas for caution and continuing its advance.
The euphoria levels in previous market spikes have been compared to that of the dot com bubble in 2001-2002, although none of those was quite as extreme. But the level in early January not only set a new record but literally flew off the chart.
“It’s a full-blown mania, and the bull’s relative youth doesn’t make it ‘safer’ to climb aboard,” Doug Ramsey, Leuthold Group’s chief investment officer, wrote in a Jan. 8 report to clients. Although Ramsey cautioned about the risks at current levels he also acknowledged that his firm is among the buyers. “We’re just as guilty as the others in chasing this momentum,” he acknowledged.
“Four days after ending the year at almost 40 times earnings (a very high valuation), the NASDAQ 100 Index posted its biggest rally in two months,” said Yahoo Finance. Those who went against the bull paid a high price. A basket of fund manager’ short positions generated losses of 10% in a single week when those stocks had their best week in seven months.
Two Little Words
There are many other signs of irrational exuberance out there. A two-word misunderstood Tweet that caused an incredible rally in the shares of a tiny company is another example of this.
Here’s what happened. On January 7, Tesla CEO Elon Musk tweeted a recommendation that followers “Use Signal,” a tiny, privately-owned encrypted messaging service.
But overenthusiastic speculators mistakenly thought Musk was recommending the purchase of shares in Signal Advance, a tiny medical device company in Texas. Shares of Signal Advance took off. By the end of the day its shares had surged more than six times - a 1,500% gain. The company’s market cap soared from $7 million to $100 million.
But the speculation was not even close to finished. In the following three trading days the shares continued their ascent, soaring in total more than 5,100% and raising the company’s market value to $390 million.
These gains are even more spectacular than they appear to be when considering that Signal Advance hasn’t filed an annual report with the Securities and Exchange Commission since 2019 and according to that filing Signal had no revenue from 2014 to 2016. The company’s CEO is its only full-time employee.
This is not the only instance when investors have confused two completely different companies. Zoom Video has become very popular with business and students since quarantines and lockdowns were ordered, and as a result its stock has been a strong performer.
However, according to Yahoo Finance, the popularity of ZOOM Video (symbol: ZOOM) sometimes spills over to the shares of Zoom Technologies - a completely different company in a completely different industry. ZOOM Video is the popular video-conferencing company. Zoom Technologies is a China-based maker of mobile phone components.
Incredible gains in stocks are not limited to misunderstood tweets and mistaken stock symbols. Early in January, the market value of Tesla, a long-time market favorite, jumped by 25% in just five days. Options in Tesla generated even more excitement. Tesla calls expiring on Jan. 15 with a strike price of $1,000 quintupled in one day to end the week at $9.15; they began the week at just 53 cents.
Bitcoin (and other cryptos) also reflect the market’s ebullience and extreme volatility. For much of the 2010s, Bitcoin was an absolutely amazing performer; it started at essentially zero and rose to nearly $20,000. Then it fell out of favor and declined to approximately $4,100. For a time, it became a poster boy of an investment gone bad.
Then the tide turned and it began rising again. In mid-December 2020, Bitcoin topped its old high of nearly $20,000 and began setting new ones. Early in January it high an all-time high of nearly $42,000; then it quickly fell to $30,800. But just several days later it jumped back to the $40,000 level. Moves of $1000/day have become typical for Bitcoin, and some days it moves several thousand dollars.
Meanwhile, speculation is flourishing. www.Bloomberg.com has reported that many individual investors were waiting anxiously for their stimulus checks - not to pay rent or to buy food, but to have more money to trade. Joe Saluzzi, co-head of equity trading at Themis Trading, pointed out that on January 12, six of the ten most active stocks were priced under $1 and traded a combined total of 2.6 billion shares -18% of all the shares traded that day. The mere mention of penny stock Zomedica, a small Michigan-based company producing products to support animal health, may be the reason its shares soared 230% in a single day on exceptionally heavy volume.
Market bubbles are nothing new. They have appeared in stocks, bonds, real estate, precious metals, and oil, and have popped up in different countries and in different centuries. In the 1600s, Dutch Tulip Bulbs became the craze, and the rarest of them rose to six times the average person’s annual salary. But there is one thing that all bubbles have in common, and that is that at some point they pop and create terrible losses in their wake.
The current rush to buy stock at any price without doing any due diligence or even verifying the correct symbol is turning this market into the 21st century version of the Roaring Twenties - and that ended in the Crash of ‘29 and was followed by the Depression. Hopefully this bull market will end a lot better than the one a century ago.
Sources: bloomberg.com; yahoofinance.com; zerohedge.com