GameStop frenzy reveals potential for increased market stress By Reuters

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To April Joyner NEW YORK (Reuters) – As the trading frenzy for GameStop Corp (NYSE 🙂 stocks and other social media favorites recedes, investors are watching for signs of potential market tensions that could affect performance of stocks in the coming weeks. For now, US equities appear to be looking beyond last week’s surge in volatility that led the market to its biggest weekly decline since October. Solid earnings, expectations for fiscal stimulus, and progress in vaccination efforts across the country are driving stocks to record levels. The S&P 500 and the Nasdaq posted records for the second consecutive session on Friday. Some investors, however, are concerned that the wild swings at GameStop and other “meme actions” may have exacerbated concerns about market volatility and elevated valuations that could make market participants more risk averse. The S&P 500 is near its highest future price-to-earnings ratio in about two decades after rising 74% from its March lows. “The recent retail activity was worrisome for the broader market,” said Benjamin Bowler, director of global equity derivatives research at BofA Global Research. Liquidity in S&P 500 futures dried up as market makers and other investors sought to reduce risk during GameStop’s surge, according to analysts at BofA. Earlier this week, “market fragility,” as measured by the bank, was at its highest level since March 2020, making US stocks exceptionally vulnerable to sudden market shocks, the firm said. . Movements in the Cboe volatility index, known as Wall Street‘s “fear gauge,” also indicate that investors may be more sensitive to market turmoil than usual. On January 27, the index rose 14 points, its biggest one-day gain since March, as the S&P 500 lost 2.6%. The scare gauge rally was eight to 10 points higher than the move expected after such a drop in the S&P 500, according to UBS strategist Stuart Kaiser. The huge backlash, he said, points to increased nervousness among investors that could suggest further market sell-off in response to negative developments. Since then, it has returned to its lowest level since early December, as US stocks have rallied this week. Still, “I wouldn’t say we’re completely over it yet,” Kaiser said. Next week, investors will focus on the quarterly corporate results of Cisco Systems Inc (NASDAQ :), General Motors Co (NYSE 🙂 and Walt Disney (NYSE 🙂 Co, as well as US consumer price data. The options markets have not given the green light to go ahead with the resumption of risk. Investor demand for calls to the S&P 500, which used to be positioned to profit on the index, soared after falling to a multi-decade low earlier this week, according to Charlie McElligott, managing director of cross-asset macro strategy at Nomura. The shift in demand points to the risk of a pullback and choppy trading in the coming weeks, he said. In the long term, various market analysts say the GameStop effect may be no more than a blink on the radar screen for markets as a whole. Dips in the VIX of 20% or more to below 25 tend to bode well for stocks, with the S&P 500 rising 2.6% a month later, according to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial. Group. Still, the exuberance that magnified market failures hasn’t completely faded. According to data from Trade Alert, options activity shows strong demand for up calls on the SPDR S&P Retail ETF (NYSE :), which includes GameStop, and the iShares Silver Trust (NYSE :), which was also rocked by retail trade. As a result, some investors say they plan to exercise caution for the time being, especially if they are exposed to passive funds that have a large number of small-cap stocks that could be sensitive to a sudden retail frenzy. “Time will tell if this has a more lasting effect on the market,” said Matt Forester, chief investment officer for Lockwood Advisors at BNY Mellon (NYSE :). “We need to keep an eye on our properties to make sure we are not overly exposed to these trends.”