Analysis: A 'buy' is just a tap away: stock market dabblers drive trading boom into 2021
21/01/2021 07:00
(Repeats from Wednesday)
By Thyagaraju Adinarayan and Saikat Chatterjee
LONDON, Jan 20 (Reuters) - A 1000% jump in the penny stock
of a company with no staff and a high school investing club that
doubled its money are just two examples of the big gains to be
made from a retail share trading boom that shows no sign of
flagging in 2021.
Three weeks into the year, as world markets hit new record
highs, retail investors, often trading from home on mobile
phones, are credited with boosting the fortunes of the small-cap
Russell 3,000 share index, where 10 of the top 20 best
performers have surged by around 75% since the start of 2021.
There is little or no research coverage on some of these
companies in the Russell index, such as cannabis data aggregator
Akerna KERN.O which has doubled in value already this year.
Shares in an over-the-counter traded U.S. healthcare company
Signal Advance SIGL.PK soared to $70 from 70 cents in under a
week after Signal was mistaken for an unlisted texting app also
called Signal that Tesla founder Elon Musk had tweeted about,
saying "use Signal." urn:newsml:reuters.com:*:nL8N2JM4XV
"These are not normal markets!!" -- Deutsche Bank strategist
Jim Reid said.
Signal Advance shares have since dropped to $7, but early
punters would have netted hefty gains.
Retail broker eToro told Reuters it registered more than
380,000 new users in the first 11 days of 2021, adding to the
five million who used it to trade last year. It says a third of
its base joined in 2020 when trading on its platform surged
five-fold from 2019 to $1.5 trillion.
Retail investors' participation in U.S. equity order flows
increased to nearly 20% in 2020 from 15% in 2019, while orders
from long-only funds fell to 6.4% last year from 9.7% in 2019,
data from Swiss bank UBS showed.
"Historically, people have had to sort of give up their day
jobs if they wanted to be a day trader... this is a much
different and probably stickier phenomenon than we saw during
the dotcom bubble," the head of equity trading strategy at a
U.S. bank said.
He was referring to the late-1990s tech stocks run-up which
ended with a crash in 2000.
FROTHINESS
The reasons for the retail rush are well-documented --
lockdowns that boosted savings rates, policy stimulus that has
put money into people's pockets, the lack of sporting events to
bet on and zero return on cash savings.
More importantly the mushrooming of mobile trading apps have
made it easy for amateur stock pickers to access the $85
trillion global stock market.
Robinhood, one of the biggest apps, said it had 13 million
users as of last May, half of them first-time investors with a
median age of 31 years. It declined to reveal more up-to-date
figures.
Some wannabe investors are just teenagers.
Rob Almeida, a portfolio manager at MFS Investment
Management said his 16-year old son was mocked by his friend,
who runs an investment club at school, for making a 30% return
from a MFS fund last year while they were doubling or tripling
their money by investing in stocks via mobile apps.
"His buddies were teasing him, because they considered that
a pretty meager return. So all of that points to me ...
frothiness," Almeida said.
He noted too that the cash flooding into the markets was
colliding with tight net supply of new equity, something evident
in the performance of new listings, such as AirbnB ABNB.O and
DoorDash DASH.N . Both companies doubled on debut.
A Renaissance ETF IPO that measures the performance of
U.S. IPOs is up 200% since March, versus 57% for the benchmark
index .SPX .
There are signs that retail players are moving to trade
derivatives. Almeida noted "a lot more" buying of single-stock
options, derivatives that allow holders to buy shares at
pre-determined prices.
Volumes of such option contracts surged last month to 60.1
million, almost triple January 2020 levels, based on data from
the Options Clearing Corporation, the world's biggest
derivatives clearing house.
The trend is worrying because dealers who sell these
derivatives must hedge their risk with a long position on the
corresponding stock, inflating prices further.
The sheer momentum and prospect of double-digit returns is
sucking in more players to the markets. Some market
professionals are worried a crash is inevitable.
Keith Temperton, a sales trader at Forte Securities
brokerage, blames an "explosion" of chatter on internet forums
for "speculative bubbly moves in illiquid small cap names."
"This has not ended well historically," he said.
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AAII https://tmsnrt.rs/39KB4GH
Option activity https://tmsnrt.rs/3p10CpB
Option market structure https://tmsnrt.rs/38YplFe
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(Reporting by Thyagaraju Adinarayan and Saikat Chatterjee;
Editing by Sujata Rao and Jane Merriman)
((thyagaraju.adinarayan@tr.com; +44 20 7542 7015; Reuters
Messaging: thyagaraju.adinarayan.thomsonreuters.com@reuters.net;
Twitter @thyagu))