Home Finance Retail traders splurge on risky plays

Retail traders splurge on risky plays

An employee views a FTSE share index board in the atrium of the London Stock Exchange Group Plc's offices in London, U.K., on Wednesday, May 29, 2019. While the FTSE 100 Index has climbed about 15 percent since June 2016 in local currency, it's down in both euro and dollar terms. Photographer: Luke MacGregor/Bloomberg via Getty Images

Freshly emboldened retail investors have continued piling into risky assets. This is by supporting a bounce that has buoyed everything from so-called meme stocks to cryptocurrencies despite economic worries and geopolitical uncertainty. Weeks-long rallies in some of the market’s most speculative names have far outpaced a broader rebound in the S&P 500, despite a selloff that saw the benchmark index shed 0.6%. This also declines in many of the more comparatively risky assets that have rallied in recent weeks.

Shares of GameStop and AMC Entertainment, two companies most closely identified with the meme stock mania that drove astronomical stock price moves in 2021. They have nearly doubled in price over the last two weeks. This is after worries over tighter monetary policy and the war in Ukraine slammed stocks. Other moves include a 26% rally in Cathie Wood’s ARK Innovation, an ETF replete with high growth names. A 19% jump in cryptocurrency bitcoin and a 36% rise in electric car maker Tesla. The S&P 500 is on track to finish the quarter with a 3.4% loss. This is after swooning as much as 12.5% earlier in the year.

While the rebound has been pinned on everything from quarter-end rebalancing to relief that the Federal Reserve is finally training its sights on inflation, retail investors have definitely played a significant part, with Goldman Sachs. Retail traders’ net purchases of stocks and ETFs totaled $5 billion this past week. This was stated by JP Morgan strategist Peng Cheng. Dan Pipitone, chief executive of retail brokerage TradeZero stated that the retail is seeing that speculative trading still works and is still trying to catch the high-flyers of the day.

For AMC, Gamestop and other stocks popular with individual investors, call options, typically employed to express a bullish view on stock prices, have drawn strong activity. For example, there are 1.8 AMC call options open for every open put contract on the stock, about the most upbeat this number has been since May 2021. AMC was one of the most bought speculative stocks analysts at Vanda Research said. This is by noting that in the past strong flows into AMC have heralded a broader rally in other less well-known names. The average retail investor portfolio has now clawed back a good portion of the losses.

RJ Assaly, head of business development at artificial-intelligence-driven market screening platform Toggle, said that his models based on an analysis of AMC’s past trading patterns had predicted the stock rising as high as $30, a level it touched. Past instances of such bullish signals, in December 2020 and May 2021. They saw the stock overshoot its predicted price by $15 to $30 dollars. The volatility associated with meme stocks and many other recent market leaders can be a two-edged sword. This is particularly for investors who bought them when speculative fervor ran high.

GameStop and AMC are still down 52% and 59% from their closing highs. Bitcoin is off 30% while ARK is down 56%. So far, that hasn’t stopped some individual investors from betting these speculative names will continue to rise. Retail traders have been paring buying in the large cap names that were more popular earlier in the year. This investor base is now purchasing mainly speculative meme stocks, call options, and cryptocurrencies.

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