By: Steve Smith
The term “irrational exuberance” came into the financial lexicon in 1996 when then-Fed Chairman Alan Greenspan used it to describe the stock market. The dot.com craze was just getting started and stocks then went on to a historic run before the bubble burst some four years later.
They say history doesn’t repeat but rhymes. I don’t think the overall stock market is in a bubble. But, I still feel the market will maintain its upward trajectory and the Options360 Service currently has four bullish positions against a small SPDR 500 (SPY) put hedge. However, irrational speculation is running rampant, especially within certain market pockets. Retail traders are throwing reasoning out the window, leaping without looking with many likely experiencing large losses.
Some quick examples; last week, Elon Musk tweeted, “Use Signal.” Signal Advance, a tiny stock with a market cap of $6.3 million on the day before, gained 525% that day. It didn’t matter that Musk was referring to using Signal, an encrypted messaging app — not the stock. Even after the tweet was clarified, Signal the stock gained another 90% the next day.
The IPO market’s on fire with the list of new issues and SPACs, which have doubled on the first day of trading — is becoming too long to list. An example that conceptually, buying into an IPO has become manic is Petco (WOOF), which saw shares climb 80% above the offering price. Petco’s a 50-year company selling pet food. It’s not disrupting anything and it certainly won’t ever be doubling revenues.
When speculation’s running rampant, it doesn’t matter what the business is, let alone, what it might be worth in five years. What matters is what somebody’s willing to pay for the shares today and tomorrow.
The higher prices go, the more eager people are to buy. The more eager people are to buy, the higher prices go. And the higher prices go, the more eager people are to buy.
I may sound like a broken record, but this is simply a game I’m unwilling to play. Yes, I do look on with some envy as these stocks like Churchill Capital (CCIV) come out of nowhere, and double in a matter of days — but I need to stay in my lane.
That said, the Options360 Service recently added bullish positions in two speculative names; EV startup Electrameccanica Vehicles (SOLO) and INSU Acquisition (INAQ), a SPAC-backed by Mark Cuban and Chamath Palihapitiya which acquired Metromile, a digital-based auto insurance company.
The bottom line is: While the irrational speculation going on all around me, I remain focused on grinding out trades with an eye on realistic expectations and managing risk.