According to a senior strategist at JPMorgan, there is a serious problem with the stock market. As hopes that there may not be any economic landing at all grow as a result of a strong labor market and falling inflation, stocks have roared back from their 2022 lows.
But there might be trouble simmering below the surface. Marko Kolanovic, chief market strategist and cohead of global research at the Wall Street bank, is concerned that retail traders have ignored warning signs coming from the bond market because they believed that inflation had already been defeated and ignored flashing red signals from the bond market.
In a note to clients on Wednesday, Kolanovic stated that “over 20% of all market volume is coming from retail orders.”
Volmageddon 2.0
Retail investors favor a variety of companies, not just those that are struggling financially. Additionally, over the previous six weeks, the value of high beta stocks like Tesla and MicroStrategy, which offer higher risk and returns than the underlying stock market, has doubled.
Cryptocurrencies like the dog-themed meme token Floki have also grown significantly, and all it frequently takes to send them ticking upward is Elon Musk posting a picture of his pet dog on Twitter—behavior that is reminiscent of the 2021 Shiba Inu coin mania.
- A top strategist at JPMorgan said, there is a serious problem with the stock market.
- For daily and weekly contracts, notional volume for these short-term options approaches $1 trillion per day.
- Now, the possibility of a market crash is similar to that of Volmageddon in 2018
Kolanovic claimed that these novice investors are making an effort to pick a fight with a Federal Reserve determined to cool the economy rather than investing in a diversified portfolio using prudent levels of margin.
With cryptocurrency, meme stocks, and loss-making businesses responding to Fed communications the best, he wrote, “this behavior is not just fighting but also taunting the Fed.” He continued by issuing a caution regarding the growing danger posed by the acceptance of high-risk derivatives, such as the “zero days to expiry” (0DTE) contract, which is favored by many retail investors.
‘For daily and weekly contracts, notional volume for these short-term options approaches $1 trillion per day,’ Kolanovic said.
Everyone might end up running for the exit all at once when a broader correction invariably follows due to the herd mentality and propensity of novice investors to make high-risk bets on erratic stocks and options, he said.
This could prepare the market for a crash similar to 2018’s “Volmageddon”, in which a selling spiral led to even more selling. Kolanovic said that although history doesn’t repeat itself, it frequently rhymes.
