Retail Animal Spirits are Back

You have to be there to know it.  You have to be burned shorting to feel it.  The animal spirits in the meme stock / pump and dump world is back.  This is nothing like the crazy January/February period, which I doubt can ever be topped for a very long time.  But it does almost rival the late May/early June AMC led crazy period where meme stocks were flying, you had random pumps that didn't die out after day 1 or 2, and kept pushing higher in a parabolic rise, pushing short sellers to the limit and getting retail daytraders exuberant.  

It always seem to start with one outlier move in a stock that gets retail traders excited, looking for the next play to repeat that kind of move.  This time, it was SPRT, a massively shorted stock with over 40% of the float shorted.  That parabolic move in late August also coincided with the AMC squeeze during that same week, ending on Fri, Aug 27. 

AMC is the most owned retail stock among the daytraders, and its moves often determine the mood of the small cap speculative marketplace.  AMC has been steadily going higher over the last 2 weeks, pumping up the bullish sentiment among retail.  

Then the second wave plays start to come along, trying to find the next SPRT, and they have piled into BBIG, another stock with a high short % of float.  

And BBIG is now the most popular name among the small cap pump and dump traders, and recently traded over 1M options in a single day, almost as much as AAPL, the most popular single stock option.  And of course, almost all the action in BBIG is in calls.  The call volume is so high that it now will likely follow the AMC weekly pattern of strength on Monday/Tuesday as retail traders pile into weekly calls, and weakness on Thursday/Friday as they either sell their calls, or let them expire worthless.  Retail traders don't have the capital to exercise their call options (if in the money) in almost all cases, so they either have to sell on their own or they get liquidated due to lack of margin.  

What is interesting is that the SPX is trading sideways to lower for the past few days and it hasn't made a dent into the bullish sentiment among the Reddit and Stocktwits crowd.  Usually these periods of hot speculation don't last for long.  The hotter the fire, the faster it burns out.  

These kind of frothy small cap markets and bitcoin speculation all have their roots in very loose monetary and fiscal policy.  Its not a sign of prosperity or technological progress.  At least in 1999-2000 you had a real gaming changing technology (internet) that was at the root of the speculation.  The root of this speculative fervor that has been on and off for the past 17 months is just because there is way too much money sloshing around.  With this kind of profligate fiscal and monetary stimulus, the US dollar has become part reserve currency/ part casino chip.   

This is the monster that Powell has helped create.  There is no going back to a regular ordinary market without a big drop in the SPX.  Will the Fed come in to rescue the post bubble crash with more QE and perhaps equity ETF purchases?  I believe the answer is yes, but will it be enough to get a V bottom off the biggest bubble ever?  That would require some serious firepower and not just jawboning.  Are they willing to throw the US dollar under the bus (and risk reserve currency status) to rescue the stock market?  They just may be dumb enough to do it.  

Seeing subtle signs of weakness in the SPX, I do think that will lead to a bigger dip next week, and it seems like traders have been front running post opex weakness by selling around monthly opex (in May, June, July, and August).  Treasuries look like it has strong support at 1.37/1.38% 10 yr yield, and it bounced again.  Fund managers seem to be slightly cautious, but their positioning doesn't seem to have changed.  And as mentioned earlier, retail traders haven't been this bullish since early June.  With Fed taper still in front of us, and debt ceiling/possible government shutdown over the budget, there are still some events for the market to worry about in the coming weeks.