RPT-Wall St Week Ahead-GameStop Frenzy Reveals Wider Stress Potential In The Market

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NEW YORK, Feb.5 (Reuters) – As the trading frenzy of GameStop Corp stocks and other social media favorites recedes, investors are eyeing signs of potential market tensions that could weigh on stock performance in the weeks to come up.

For now, US stocks appear to be watching after last week’s surge in volatility that drove the S&P 500 to its biggest weekly decline since October. Strong earnings, fiscal stimulus expectations and progress in nationwide immunization efforts are pushing actions to unprecedented levels.

The S&P 500 and Nasdaq posted records for a second consecutive session on Friday.

Some investors are concerned, however, that the wild swings in GameStop and other “meme stocks” have exacerbated concerns about market volatility and high valuations that could make market participants more risk averse. The S&P 500 is near its highest forward price-to-earnings ratio in about two decades after rising 74% from its March lows.

“Recent retail activity was of concern to the broader market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.

S&P 500 futures liquidity dried up as market makers and other investors sought to reduce risk during the GameStop push, BofA analysts said. Earlier this week, “market fragility,” as measured by the bank, stood at its highest level since March 2020, making US stocks exceptionally vulnerable to sudden market shocks, the company said.

The movement of the Cboe Volatility Index, known as Wall Street’s “fear gauge,” also indicates that investors may be more susceptible to market turbulence than usual. On January 27, the index jumped 14 points, its biggest one-day gain since March, as the S&P 500 lost 2.6%.

According to Stuart Kaiser, strategist at UBS, the rise in the fear gauge was 8 to 10 points greater than the expected movement following such a decline in the S&P 500. The overreaction, he said, indicates increased nervousness among investors who might suggest larger sales in the market in response to negative developments.

The VIX has since returned to its lowest level since early December as US stocks rallied this week. Even so, “I wouldn’t say we’ve completely passed it yet,” Kaiser said.

Next week, investors will focus on quarterly results for companies Cisco Systems Inc, General Motors Co and Walt Disney Co as well as data on consumer prices in the United States.

The options markets did not turn on the green light to move forward with the risk recovery.

Investor demand for calls on the S&P 500, used to position themselves for gains in the index, surged after falling to a decades-low low earlier in the week, according to Charlie McElligott, chief executive of the macro-asset strategy at Nomura. The swing in demand points to a risk of a pullback and trade turmoil in the coming weeks, he said.

Longer term, several market analysts argue that the GameStop effect may be nothing more than a signal on the radar screen for the markets as a whole. VIX declines of 20% or more to less than 25 tend to bode well for stocks, with the S&P 500 rising 2.6% a month later, according to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group.

Yet the exuberance that amplified the market failures has not completely vanished. According to data from Trade Alert, options activity shows strong upside call demand in the SPDR S&P Retail ETF, which includes GameStop, and the iShares Silver Trust, which has also been rocked by trading in detail.

As a result, some investors say they plan to be cautious for now, especially if they are exposed to passive funds that hold a large number of small-cap stocks that could be susceptible to a sudden retail frenzy. .

“Time will tell if this will have a more lasting effect in the market,” said Matt Forester, chief investment officer of Lockwood Advisors at BNY Mellon. “We need to monitor our holdings to make sure we are not overly exposed to these trends.”