Momentum is defined by Websters as: “strength or force gained by motion or by a series of events.” There is certainly momentum in the stock market now. I’ll get to mania below….
Where is the market now and how did it get here?? The simple answer is the stock market it at record highs because there are more buyers than sellers. Simple is not always better. Yes, the U.S. major stock market indexes are at the highest in history (as of today, February 19, 2021), but a better answer to how it got here is much more insightful than “more buyers than sellers”. Sure, the basic law of supply and demand determines price. But it is the factors driving demand for stocks over the last near-year that explain the higher price momentum and has fueled what some say is a stock market mania now. Okay, time for a reminder on “mania”. Oxford Languages defines mania as “an excessive enthusiasm or desire; an obsession.” What the world witnessed in GameStop stock recently is an excellent example. There are many examples besides GameStop. Speculation in cryptocurrencies, EV’s, marijuana, clean energy and other headline-grabbing “disrupters” are making mania-like moves.
In this month’s Investor’s Edge column, I want to shed a bright light (think of a yellow traffic signal light) on the stock market’s level today, the catalysts that got it here and what you as an investor should consider. So, with signs of a market mania and what is realistically unsustainable price momentum in many stocks, I think is helpful to understand the major factors fueling a seemingly insatiable appetite for quick, short-term profits. What you should consider for your own benefit will be discussed below.
There are numerous factors that have led to mania investing in high-risk segments of the stock market (as I noted above). Here are a few I think have fed the frenzy the most. What has been happening in the stock market has been extraordinary. Looking back over my near 37-year career as an investment advisor, only the 1999/2000 climactic run-up in the market resembles the market now.
* * SPACS – These are the new IPO’s. SPAC’s (Special Purpose Acquisition Corporations) are created and issued to public investors by their “promotors”. In my experience, anytime investments are promoted they rarely end well. SPAC’s have had incredible growth. Last year the number of new SPAC issues was 4 times 2019’s offerings – and that was the previous high. The $70 billion raised by SPAC’s last year was 5 times the 2019 amount.
* * Social Media – Reddit and “subreddit” WallStreetBets, Twitter and message boards throughout the internet have had a massive impact on specific stocks. The likes of Reddit and Robinhood’s trading platform have made stock speculation a cultural phenomenon.
* * Margin – Investment leverage is achieved through investing borrowed money. This is called margin. Like other aggressive investment techniques, margin investing adds another element of risk. Sure, margin trading can result in higher profit potential than traditional investing. Investors use of margin has soared in recent months.
* * Options – Stock options, especially buying “call” options, have seen volumes explode to the upside recently. This is a classic sign of stock speculators gambling on specific stocks going up. Buying options is another form of stock leverage and usually best used by investment professionals. In the last 9 months, they have been used my many million relatively new investors. Like all gambling, option trading is a zero-sum game. The few winners win what the many losers lose.
* * Short Squeezes – While generally reserved for experienced investors, short selling in some stocks has back-fired. Short selling stock basically involves selling borrowed stock. The short seller hopes to sell the borrowed stock at a high price and then buy it back lower later to return the shares to the lender. If, instead, the borrowed stock goes up, the short seller then is likely to buy the stock back quickly to minimize the loss of paying more than it was sold for initially. A short squeeze is an attack on short sellers and occurs when great demand all at once to buy a specific stock forces the short seller to buy the stock to “cover his shorts”. This was at the epicenter of the GameStop stock craze.
All the above, and more, have led to the…
* * FOMO – Fear of missing out is at full force during a mania. Too many people know too many people making too much “easy” money. It is the great human condition, emotional. This speaks to the psychology of investing and is typical of investor behavior. Fight it! Avoid the temptation.
Now, what might you do. First, have an investment plan. Secondly, stick to it. As a SCUBA diver, I respect the mantra, “Plan your dive, and dive your plan.” All investors should plan their investments and invest with their plan. Yes, the FOMO feeling is hard to resist. But if your long-term, reasonable risk investment plan doesn’t allow for speculation – then don’t do it. Investing and gambling are quite different. You know that. And remember, the stock market is not a casino. Also remember, “what goes up, must come down”. After a remarkable advance since last April, the stock market at some time will go down. Before that happens, ask yourself how you feel if the value of your stock investments dropped 25 or 30 or 40 percent. What would you do? Know those answers before it happens. The opposite of FOMO is GMON (Get Me Out Now). Avoid reacting emotionally to a falling market. Have an exit strategy in your plan.
I hope this helps make some sense of what appears to be a market mania and more importantly, what you might do now.
Invest wisely!
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