Speculative areas of the market are not just red hot, they are white hot.
Initial Public Offerings (IPOs), a barometer of speculative froth, are on fire. In the past few days alone:
- Petco Health and Wellness (WOOF) jumped more than 63% on their first day of trading.
- Poshmark (POSH) saw its share price more than double on the first day.
- Affirm Holdings (AFRM) nearly doubled on day one, then continued to rise.
And of course, two big-name IPOs from December, Airbnb (ABNB) and DoorDash (DASH), saw a first-day double and a near-double, respectively.
But frenzied IPOs are only the beginning. In the first full week of trading for 2021, penny stocks (companies with share prices less than a dollar) accounted for more than 20% of overall volume. That is mind-boggling.
At the same time, trading volume in December was higher at broker-operated venues (where trading apps like Robinhood send their orders to be executed) than at the actual Nasdaq or New York Stock Exchange.
This is in keeping with estimates that a whopping 10 million new retail trading accounts were opened in 2020, and that individual retail traders accounted for 25% of total volume on the busiest days of 2020.
We explained the roots of this phenomenon six months ago on July 13, “How Silicon Valley Engineered a Retail Trading Mania.”
To quickly recap, the speculative cocktail of commission-free trading, highly addictive online trading platforms (OTPs) like Robinhood, a mass-distribution of $1,200 stimulus checks, an ability to pump stock trading ideas through social media and online communication channels, and a “bored in lockdown” incentive to play around with stocks all came together to fuel a neutron bomb of speculative frenzy.
And the craziness seems to be getting crazier, as evidenced by a recent tweet from Elon Musk — now the richest man in the world, on paper anyway — which helped a stock gain more than 6,300% over the course of three trading days completely by accident.
The Musk tweet was only two words — “Use Signal” — and was almost certainly a reference to switching from the Facebook-owned WhatsApp messaging service to an alternative messaging app called Signal, because Signal is believed to have better privacy protections than WhatsApp.
But the online community saw Musk’s “Use Signal” as a chance to pump the shares of Signal Advance (SIGL), a penny stock trading below 60 cents.
The trading volume in SIGL then exploded, purely because of the Musk tweet mix-up — although many who were buying surely knew it was a case of mistaken identity, but didn’t care. As of the Jan. 14 market close, SIGL remained up more than 2,300%.
For those who still believe in the efficient market hypothesis, it would be interesting to hear an explanation for the Signal episode (which is ongoing).
But nor is that the craziest part. Aggressive retail traders are not only fully aware of their newfound powers, but they are actively using them to conduct bull raids in defiance of fundamental logic.
To give a quick bit of background, the greatest trading book of all time is Reminiscences of a Stock Operator, published in 1923.
Through the voice of a pseudonym, the book describes the tales, exploits, and lessons learned of the legendary speculator Jesse Livermore, a man who made and lost multiple fortunes in his speculating career (including a reported gain of $100 million or more in the 1929 stock market crash).
Near the end of Reminiscences, the book describes classic methods of manipulating a stock, for the purpose of helping a pool of buyers either accumulate a large block of shares at a low price or sell a large block of shares at a high price.
Part of that old art — which is basically illegal now — was conducting bull raids and bear raids, which were concerted efforts to drive the price of a stock (or a commodity) much higher or lower.
What has happened today, nearly 100 years later, is that what’s old has become new again through the use of online message boards.
Retail traders in the “Wall Street Bets” community on Reddit, a popular message board site, have taken it upon themselves not to look for stocks with good fundamentals and bullish prospects, but to pick a name of their own choosing and make it go higher through sheer force of will.
These so-called “meme stocks” — which get that designation because the online community creates an endless stream of internet memes pushing the bull case — get a bullish boost not through fundamental arguments, but through the clearly telegraphed message that “we in the community are going to buy the heck out of this thing.”
It is like the old bull raids of Jesse Livermore’s day. Except, rather than being conducted by a pool of wealthy insiders and market operators, you have a bunch of Robinhood traders on message boards, sending out a kind of bull raid Bat Signal through a proliferation of meme posts.
While this has been going on for a while now, the most spectacular success to date was logged this week in the stock of GameStop (GME), a beaten-down retailer that most of (professional) Wall Street expects to fail.
The business model of GME is so 1990s that it hurts: They let customers rent physical video game cartridges from physical locations, like a kind of Blockbuster Video for gaming consoles.
Nearly everything about the GME business model, from the brick-and-mortar stores, to the physical game cartridges, to the challenge of surviving a pandemic, smells like an extinction event, with the death of Blockbuster Video as a kind of template.
As a result of this gloomy outlook, GME had the second-highest “short” float of any publicly traded stock, meaning that short sellers were making highly aggressive bets that the company would fail.
The shorts had been fighting a losing war against GME at least since August, when the share price steadily began to rise.
But a few weeks ago, an army of Reddit-savvy retail traders decided to make GME their next high-profile bull raid target, figuring they could trigger a massive “short squeeze,” the term for what happens when a tsunami of long-side buying power forces the shorts to buy their shares back at much higher prices.
And the campaign worked, with a vengeance.
After a few weeks of beating the drum for a bull raid on GME, the company announced new additions to its board of directors that included the e-commerce genius Ryan Cohen, a co-founder of Chewy (CHWY).
That bullish news was enough to send GME shares rocketing higher, to the tune of more than 100% gains in two trading days, on trading volume in the vicinity of 125 million shares.
That was enough to catch Jim Cramer’s attention, who said on his Mad Money TV show:
“Right now, if you go to those sites… they’re mostly populated by younger readers and participants who are plainly, openly plotting to blow up the shorts — in this case by buying GameStop at any price and bidding the stock up, up and up to crush the shorts so they have to cover… It’s incredible to watch. I think they’re succeeding beyond their wildest dreams.”
In some respects, the investment community has never seen anything like this, ever. While bull raids were common a century ago, not even in Jesse Livermore’s day were such raids conducted out in the open, brazenly, in defiance of logic and common sense.
It isn’t even “this stock is going to be the next Tesla.” Instead, it has morphed into, “This stock will go up because we say so.”
One is reminded of the famous quote widely attributed to political operative Karl Rove, in the immediate aftermath of the Iraq War, in 2004:
“We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do’.”
New IPOs doubling left and right, penny stocks flying, meme stocks being launched like rockets at will, coordinators of bull raid campaigns openly boasting of their power — how long can all of this last?
Not forever, that’s for sure. But we also can’t know when it ends. Consider, for example, the fact that last year’s distribution of $1,200 stimulus checks provided the initial dose of rocket fuel for the Robinhood-enabled retail trading mania — and another round of $2,000 checks is likely coming soon.