GRAPHIC-Game on after GameStop: Stocks soar again despite amber warnings
LONDON, Feb 3 (Reuters) – When the man in the street starts dispensing stock market tips, it’s time for the professionals to exit, goes the saying.
Yet the torrent of cash sloshing around world markets means any warnings arising from last week’s frenzied face-off between retail traders and Wall Street hedge funds over U.S. videogame chain GameStop seem likely to go unheeded.
Most traditional market-top signals, as outlined below, are flashing amber – just as they did before the bursting of the dotcom bubble two decades ago.
What is different this time around is the sheer amount of money central banks and governments are pumping in, allied to interest rates that look firmly stapled to the floor for years to come.
With the GameStop effect seemingly already fading as stocks get back on course for new highs, below are five signals typically seen as warnings of market exuberance:
1/ THE BIG WALL STREET SHORT VS RETAIL
GameStop’s double blow: retail traders first managed to force hedge funds to sell positions to cover their bearish bets, and then, with the rally fizzling out this week, retail traders coming late to the party got burnt.
2/ NOTHING CAN STOP U.S. BIG TECH
The GameStop drama has done little to no damage to technology stocks’ dominance, with a concentration risk rising in markets as the sector expands to make up a fifth of all global stocks – the highest since the dotcom bubble of the late 1990s.
3/ GIVE ME MORE
Given record demand for equities, initial public offerings have done extremely well, much like the response to IPOs during the dotcom bubble, with prices hitting eye-watering valuations. Meanwhile, bonds have also drawn in a great deal of interest.
4/ BUY, BUY AND BUY
The frenzy is also visible in options markets. The CBOE put-to-call ratio is firmly sitting at levels last seen just before the dotcom bubble burst in 2000. Put options confer the right to sell at a pre-agreed price and calls allow holders to buy.
5/ TAKE THE M2, ENJOY THE BUY RIDE
Another indicator is the extent of central bank liquidity support in the system. M2, a measure of money supply that takes into account cash and deposits, jumped sharply last year spawning bubbles in many corners of the markets from bitcoin to high-flying tech stocks.
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