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Nobody on Wall Street ever got a fat bonus scaring people out of the market.
That’s logical. Wall Street is largely in the business of helping companies sell securities to the public and coaxing corporations into making deals, both of which generate juicy fees.
Having one of your market analysts screaming that equity market end times are nigh isn’t exactly helpful background music as your bankers try to build a book of orders for that upcoming IPO. In fact, such a stark warning would almost certainly see our analyst counseled on pursuing other careers.
But there’s career risk for analysts in keeping quiet, too. After all, if they do see reasons to be worried about the market but say nothing, and the market does tank, that’s an equally bad look.
So, what’s a career-conscious analyst to do?
It’s obvious. Issue warnings. Raise concerns. Heck, even wave a tiny red flag or two. But just do it very, very quietly.
That way, if something does go wrong, you can always refer clients to back to your comments about the growing pressures on the market, just before the big crack came. On the other hand, if the market keeps climbing, you can shrug off those bearish moments as well-reasoned notes of caution.
Anyway, with the SPDR S&P 500 ETF hovering around new highs, after a more than 25% rally from the worst of April’s tariff-induced drop, you can start to hear these ever-so-faint words of warning from the Street.
“The pockets of exuberance are growing,” Deutsche Bank analysts recently wrote. They hastened to add, “However, other measures of exuberance remain subdued.”
In a note Tuesday, Bank of America analysts couched their concerns like this: “Although we’re not seeing classic signs today of a blow-off top at the broad index level, pockets of the market — e.g., recent IPOs CRWV & CRCL — are exhibiting bubble-like dynamics.”
And on Monday, Morgan Stanley’s chief US equity analyst suggested clients “stay bullish while acknowledging the risks,” and nodded to “some recent froth in lower quality names.”
To be fair, JPMorgan analysts did not equivocate much in a note this week when they wrote that extreme levels of crowding into riskiest, most volatile kinds high-beta stocks “not only presents a risk for this crowded segment, but is also a red flag for the broader market implying there is rising complacency in the short term.”
But clearly, folks who spend their lives keeping an eye on the market are seeing lots of behaviors that look, for lack of a better word, a bit “toppy.”
That is, there’s a lot of highly speculative behavior in the market that can, sometimes, come before a fall. Just look at the resurgence of meme stock mania in shares like Opendoor or, today’s edition, Kohl’s. Or the frenetic trading of crypto and crypto-related stocks. Or the return of SPACs.
And, while nobody cares about valuation anymore, it’s worth noting that the stock market is extremely expensive by conventional metrics like price-to-forward-earnings and price-to-sales ratios.
The S&P 500’s forward P/E multiple is currently 22.4x. It’s only been higher on a sustainable basis during the pandemic-era trading boom and during the tech bubble of the late 1990s. Its price-to-sales ratio of more than 3x is likewise in dot-com bubble territory, with some market leaders, like the market’s best-forming stock, Palantir, sporting valuations that appear objectively insane.
Now time for some mealymouthed hedging of my own. This is not investment advice! Stock markets that are expensive can continue to get more expensive, meaning there’s more upside to be had. And of course it’s always possible that the market is correctly sniffing out the profit potential of the future before analysts can find a way to properly pencil it in to their own quantitative models.
On a personal note, I know from long experience that I have a tendency to see potential disasters everywhere. (I think it’s my Irish side.) Even if they do eventually materialize, it can take a good long while. In other words, I’m a bit risk averse and not much of a speculator.
But the recent whispered warnings from Wall Street suggest I’m not the only one who’s a bit jumpy after the recent rally.
S&P 500 closes at another record high, but everyone’s watching the meme stocks
The S&P 500 inched up less than 0.1% to close at a fresh record, the Nasdaq 100 fell 0.5%, and the Russell 2000 led the way with a 0.8% advance.
Tech was the source of weakness on Tuesday, the only S&P 500 sector ETF to decline. Healthcare, real estate, materials, industrials, and consumer discretionary all rose more than 1%.
But many of the intriguing stories of the day were in the names outside the benchmark US stock index.
Kohl’s doubled in the first few minutes of trading in a seeming r/WallStreetBets-inspired meme stock short squeeze before being halted for volatility and finishing up 37%.
Opendoor was up more than 20% early in the session but finished down 10% as the bullish flows that have fueled the stock’s surge became more balanced.
Lucid rose double digits after announcing that owners of its Air sedan would be able to access Tesla’s charging network before the month is out.
Healthcare company IQVIA was the best performer in the S&P 500 after posting stronger-than-expected earnings along with guidance that was better than anticipated. Another company that specializes in clinical trials, Medpace, rocketed higher on an earnings beat and improved guidance.
Lockheed Martin, on the other hand, slumped double digits on a Q2 earnings miss. Philip Morris International also tumbled despite raising its profit guidance and reporting better-than-expected earnings, as this news also came along with its first quarterly decline in Zyn shipments. Another earnings-linked sell-off came from General Motors, which reiterated guidance for a tariff hit of up to $5 billion this year.
Coca-Cola dipped despite beating on earnings and adjusted operating profits as the beverage seller suffered a decline in volumes sold. Oh, and cane sugar Coke is coming this fall as an extra offering.
Oscar Health rose 8% despite shifting its guidance to an operating loss of $250 million this year versus its prior expectation of a $250 million profit, as the company suffers from the same challenges to the ACA marketplace as Centene.
Chatter about another potential railway merger influenced stocks, even as Warren Buffett himself threw cold water on the reports, sending CSX and Norfolk Southern up more than 1%.
Opendoor falls double digits as one-way flows frenzy suddenly reverses
The thing about a flow-driven surge in a stock is that the fires need to be stoked by continued flows from motivated buyers.
Opendoor Technologies had a near seamless run of just that for about a week, but it wasn’t really there as much today.
The stock fell 10% on the session, breaking a six-session streak where shares rose at least 10% every day and rose more than 30% in half of those days.
Volumes were down — granted, it would’ve been extremely hard to build on Monday’s insane amount of trading — as were options volumes traded.
But the nature of the volume is also instructive.
On Monday, trades of 521 million shares took place on the ask (the lowest price a seller is willing to accept, pointing to a motivated buyer) versus volumes of 480 million on the bid. On Tuesday, volumes on the bid side outnumbered those on the ask, per Bloomberg data.
The options flows were still overwhelmingly tilted toward calls — calls outnumbered puts by about 1.9:1 today versus 2:1 on Monday — but the most active option traded on Opendoor was a put with a strike price of $2.50 that expires on Friday.
When flows are more of the story than fundamentals, it’s this relatively boring tallying of motivated buying versus motivating selling that can give a clue as to how much momentum a move has and whether it’s at risk of reversing.
The Lucid Air charging rate peaks at 300 kilowatts — about 20 miles of range per minute plugged in. That’s significantly more than the 50 kilowatts available at Tesla stations through the adapter. With the adapter, charging at Tesla stations will grant Lucid owners up to 200 miles of range per hour, which could create longer charging lines at the stations.
The Lucid Air charging rate peaks at 300 kilowatts — about 20 miles of range per minute plugged in. That’s significantly more than the 50 kilowatts available at Tesla stations through the adapter. With the adapter, charging at Tesla stations will grant Lucid owners up to 200 miles of range per hour, which could create longer charging lines at the stations.
Citadel Securities: “The current level of retail bullishness is something to keep a close eye on”
Citadel Securities knows what’s up. It’s the designated market maker on the NYSE and, per the company, represents about 62% of listings on the exchange. And it’s seeing something it hasn’t seen in years.
The trading giant is keeping a “close eye” on the same thing we’re keeping a close eye on: retail traders driving eye-popping moves in the likes of Opendoor Technologies, which traded more than Meta on Monday, and Kohl’s, which doubled early in the session on Tuesday but has since pared its gains on record volumes.
“Echoing our colleagues in institutional derivatives this morning, the current level of retail bullishness is something to keep a close eye on,” Citadel Securities Thomas Sozzi wrote. “In cash equity space, retail clients on our platform have been net buyers for the past 18 trading sessions in a row! This bullish streak hasn’t been seen on our platform in over 3 years.”
(Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions. Citadel Securities has a business relationship with Robinhood.)
Add that to the list of superlatives about the speculative frenzy in full swing.
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