Mania in stocks like GameStop, surging options activity suggest a market pullback is coming

Speculative trading in some high momentum stocks and options could be signaling a near-term top, but the bull market is likely to run on for some time, stoked by prospects of an improving economy and easy Fed money, investors said…

Julian Emanuel, head of equity and derivative strategy at BTIG, said the surge of options buying and frothy trading in some high-flying stocks is very similar to the period leading up to the tech bubble crash in 2000. He said it’s very possible if the market behaves the same the S&P 500 could go to a lofty 5,047 before the bull market ends, though he is not forecasting such a surge.

Most strategist expect the S&P 500 to end this year higher, with CNBC’s strategist survey at a median 4,100. But many do expect at least one pullback early in the year. The S&P 500 closed at 3,855 Monday, up 0.4%.

“We don’t see any signs yet, concrete signs, of a medium term trading top, but this type of volatility leads us to believe that similar to 1999 to 2000, you could get a 10% to 15% pullback at any time,” said Emanuel. “From what we see right now the level of speculation leads us to conclude the typical retail investor is as bullish in the aggregate as we have seen in over 20 years. With valuations where they are now, that is the recipe for potentially rapid, albeit temporary set back in the market.”

Bank of America global strategists also don’t see the market bubble popping soon. “Even the frothiest equity indices still lag well behind performance during previous bubbles. The NASDAQ is up 96% over the past three years,” they wrote. “It rose 201% before its early 2000 peak (after which it fell by 72%). The S&P is up 44% compared to 98% in the late 1990s. The MSCI World ex US is currently flat over 3 years, so no bubble there.”

Short Squeeze Frenzy

Monday’ s trading in some high momentum names sent a flash warning to some traders. GameStop, the poster child of the recent frenzy, surged to a high of $159.18 before reversing hard, to fall below $70. It ended the day at $76.79, up 18% on the day. The company has a high short position, and it is…

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