In a surprising turn of events, U.S. stock markets posted significant declines yesterday, coinciding with the impending election for a socialist mayor in New York City, widely recognized as the financial hub of the world. While the connection may be purely coincidental, the timing has caught the attention of market watchers.
The conversation has shifted focus to the recent speculative behavior seen within the Korean retail investing community, which has been thrust into the spotlight. A notable spike in stock prices for a fried chicken restaurant chain occurred after prominent figures, including Nvidia’s Jensen Huang alongside leaders from Samsung and Hyundai, were spotted eating fried chicken in Seoul. This incident serves as a testament to the erratic nature of South Korean retail investors, as highlighted by Owen Lamont from Acadian Asset Management. He asserted that the South Korean stock market has long been characterized by unpredictable and irrational trading behavior, particularly among fringe stocks.
This volatility echoes the 2020 meme stock phenomenon in the United States, where retail investors engaged in high-risk trading activities, driven largely by social media and the pandemic-induced atmosphere. Unlike the structured chaos witnessed during the meme stock surge, current patterns of speculation in the U.S. market also reflect a rise in risk-seeking behavior, according to Goldman Sachs. Their recent speculative trading indicator has shown increased trading in penny stocks, unprofitable companies, and those with exceptionally high EV/sales multiples.
Simultaneously, September marked an uptick in options trading, with S&P 500 options hitting record highs at 4.26 million contracts daily, including a significant portion attributed to zero-day options, as noted by analysts at Schwab.
Despite the ongoing speculative enthusiasm, research points to intriguing behavior from retail investors, particularly after companies report earnings. The phenomenon known as “post-earnings announcement drift” indicates that retail traders typically buy shares after bad earnings reports, perceiving them as bargains, and sell after positive surprises, leading to misalignment with fundamental values.
This deviation toward “dumb money” strategies, while initially successful, raises questions about sustainability. There’s a notion that if retail investors continue to thrive, traditional short sellers may be bearing the brunt of losses. However, recent events—including sharp stock price reactions to earnings from companies like Meta and Palantir—suggest that the market is beginning to favor tangible profits and cash flow over speculative hype, particularly in the tech sector.
In the context of a broader market correction, reports indicate that key speculative assets, particularly unprofitable tech stocks and gold, have begun to falter, with bitcoin exhibiting similar bearish trends.
On a separate note, a correction regarding last Friday’s newsletter highlighted inaccuracies in reported earnings growth figures for major tech firms, further highlighting the volatility and potential ramifications within the sector. Despite the miscalculation, the overall narrative remains clear: while growth within certain tech giants is slowing, especially impacting companies like Meta, attention is shifting towards financial stability in evaluating market activity.
For those seeking deeper insights into market trends and financial headlines, the Unhedged podcast offers a concise 15-minute weekly update, paralleling the themes explored in the newsletter.
