Animal Spirits Are Returning… With Mixed Results

Animal Spirits Are Returning… With Mixed Results

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How would you like to make 10X returns in two days?

That’s what GameStop (NYSE:GME) options traders were asking themselves last week. Speculators had piled into short-dated, out-of-the-money calls leading up to the retailer’s fourth-quarter earnings announcement, triggering my own concerns of a short squeeze.

These online chatroom-fueled speculative bets are the Wall Street equivalent of playing slots.

Then on Tuesday: Jackpot!

GameStop announced its first quarterly profit in two years. Shares spiked 50% on the news, rewarding these leveraged bets with 10X returns or more.

These longshot gambles are becoming increasingly common. Last month, AMC Entertainment (NYSE:AMC) saw a similar spike in call buying for its Q4 announcement. And – our free stock market news and analysis website – has seen immense interest from our readers in high-risk bets like First Republic Bank (NYSE:FRC) that could rise 5X or go straight to zero.

Results have also been decidedly mixed, of course. The bet on AMC left many speculators with worthless options. And investors who bought First Republic when shares collapsed 72% on March 13 would have seen their holdings go down another 60%.

But if what we’re seeing at is true, a newfound sense of bullishness is rippling through the market. Here’s what you need to know…

1. Speculative Investors See a Swift Market Recovery…

Our most popular article last week on was

“7 Stocks Set to Soar When the Market Recovers.”

The piece by Josh Enomoto highlights stocks that could turn out to be “bold and lucrative” decisions, ranging from slow-and-steady AmerisourceBergen (NYSE:ABC), a pharmaceutical wholesale company, to the highly risky Offerpad Solutions (NYSE:OPAD), a microcap home “i-buyer.” These are stocks that have recently lost ground, and Enomoto believes their cheaper values now make them worth the risk.

The popularity of the piece highlights the growing sentiment differences between speculative retail and conservative institutional investors. Put/call option parity now sits at 0.90, signaling extreme greed among speculators. Meanwhile, rising junk bond spreads are suggesting that institutional investors believe the opposite.

The stories we run at are receiving attention from both camps.

2. … Powered by the Likes of Warren Buffett (and the Fed)

In the former case, bullish retail sentiment is highlighted by our second-most popular article on last week:

“Is Warren Buffett Going to Save ALLY Stock?”

This overview by Samuel O’Brient examines the rumors that the Oracle of Omaha might revisit a 2008-style playbook of buying up underpriced banks. It was a strategy that he and the Fed used during the last financial crisis to shore up Bank of America (NYSE:BAC), among others, and one that speculative investors believe could happen again this time around.

The Buffett rumors have already caused Ally Financial (NYSE:ALLY) to surge. Shares of the car financier once known as General Motors Acceptance are now up almost 2% for the year. And the same forces are powering enormous interest in other speculative banks. As late as Tuesday, shares of Credit Suisse (NYSE:CS) traded at a 15% premium to their intended takeover price, a sign that markets expected an even higher takeover bid from a white-knight investor.

3. Institutional Investors Pulling Back

Conversely, bond investors are having no such luck. Last Sunday, that same Credit Suisse deal wiped out subordinated bondholders to preserve shareholders. In all, around $17 billion of fairly risky Additional Tier 1 (AT1) bonds disappeared in an instant. No help from Mr. Buffett in sight.

Louis Navellier also remains bearish about companies with similarly high capital risks. He’s negative on companies like Bank of America for these faults.

“BofA has an above-average capital risk compared to other money center banks… Don’t get me wrong. Once the dust settles on this situation, this stock could once again become a strong buying opportunity. The issue is that we are not there yet.”

These signs are on full display in the price of junk bonds – the bellwether of institutional credit investing. These riskier corporate bonds tend to be the first that institutions sell off in favor of less risky ones. And yields of these have been ticking up since February.

Graph of high yield index options adjusted spread

4. ‘Follow the Money’ Is Working…

So, what should investors do?

Both Louis and Eric Fry have a straightforward answer: Follow the money.

In Louis’ case, he and the team are seeing SoFi Technologies (NASDAQ:SOFI) as a potential winner. Heavy insider purchasing highlights how this not-yet-profitable fintech company has a different risk profile from regional banking competitors.

Indeed, the other insider picks I highlighted here last week have been doing relatively well, especially compared to those without such buying.

Graph of performance of bank stocks since mar 15

Meanwhile, Eric is betting that federal spending bills can signal the next big thing for investors. In particular, the newly enacted Inflation Reduction Act (IRA) is handing out billions of dollars in tax credits to the green hydrogen industry. He emphasizes, of course, that you don’t have to agree or disagree with the politics. The important aspect is understanding where the financial incentives have been placed.

To read more about following that money, click here.

5. And So Are Growth Stocks

The upshot of these big bets is that we’re finally seeing a return of growth stocks. The tech-heavy Nasdaq 100 Index has risen 6.4% in the past month, compared to a –2.2% loss in the more conservative Dow Jones Industrial Average.

Luke Lango, too, is seeing a turnaround in certain names.

In fact, Luke says he’s spotted a new technology (not AI) that’s set to create one of the biggest tech disruptions of our lifetimes. Plus, he says he’s found the perfect way to play this “Nexus Revolution.” Click here for details.

The Tale of Two Markets, Revisited

Earlier this month, I wrote about “The Tale of Two Markets.” Investors were splitting the difference between “safe” bets like Nvidia (NASDAQ:NVDA) and absurdly risky ones like AMC and Troika Media (NASDAQ:TRKA). No one seemed quite sure whether markets would drop by half or rise 50%.

The recent banking crisis has turned this tale into a widening divide between institutional and retail investors instead. On the institutional side, banks, insurers, and pension funds are nervously eyeing their bond portfolios and worrying about investor withdrawals. The KBW Banking Index (BKX) is down a stunning 20% for the year.

On the other hand, retail investors are quickly realizing that the Federal Reserve is employing what was once known as the “Greenspan Put” — the unintentional policy of bailing out stock holders by adding liquidity to financial markets during crises.

Perhaps investors will eventually call this the “Powell Put.” The Federal Reserve balance sheet has already spiked $400 billion since the start of the recent banking crisis, flooding markets with fresh liquidity. Emergency bank lending and other credit extensions have now undone almost five months of quantitative tightening.

There’s still, of course, a long way to go before we reach a full recovery. But in the tale of two markets, the Federal Reserve is quickly becoming a protagonist in this unfolding story.

Whatever happens, the writers and analysts at will keep you informed.

On the date of publication, Tom Yeung did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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