- After a complete recovery from the March selloff, the stock market is playing at the extremes.
- Traders are piling into highly speculative and outright bankrupt stocks.
- We may not see another big crash, but don’t be surprised if the stock market cools off here.
Whether you’re a bull or a bear, I think we can all agree that this stock market is all-out bonkers right now.
Almost no-one could have predicted a complete V-shaped round-trip from the March lows. But here we are.
But are traders starting to get cocky? Here are five charts that prove we’re getting close to peak euphoria on the stock market.
1. The most bullish stock market sentiment in modern history
Yep, in the midst of a global crisis, mass unemployment, and rioting, traders are more bullish than any time in the last 20 years.
This chart shows the number of call options (i.e. traders betting on the market going higher) going back to 2000. It’s never been higher. Not even close.
We are at the extremes of complacency here which often often ends with at least a short-term correction.
2. Traders are buying bankrupt companies
Look at this chart above. At first glance you might think it’s a hot tech growth stock.
It’s not. It’s a bankrupt car rental company: Hertz (NYSE: HTZ)
This isn’t the only bankrupt stock going crazy. Traders are piling into JC Penny (OTCMKTS: JCPNQ) and Cheapsake Energy (NYSE: CHK), both of which have have entered some form of bankruptcy process. Another, Whiting Petroleum (NYSE: WLL), is up 851% since April 1st.
Do these investors know that shareholders are the last in line to get a payout in bankruptcy proceedings?
This is classic retail speculator action, often marking the top of a market rally.
3. When an unknown stock overtakes Ford…
A little-known electric truck company called Nikola (NASDAQ:NKLA) is up more than 450% since the beginning of May. Its market-cap actually surpassed Ford in yesterday’s trading session.
Maybe it’s the next Tesla? Well, not so fast. The company won’t make a single penny of revenue in 2020. And they’ve already burned through $188.5 million.
This is another pure speculation play that could be a warning sign.
4. Blockchain is back…
If you needed any further indication that we might be in bubble territory, traders are piling back into blockchain ETFs.
5. The stock market is at the extremes
Here’s one more chart that shows just how much traders have pushed this market to the edge.
These are all technical indicators used by traders to identify overbought conditions. The percentage of stocks with an RSI above 70 is at 30 year highs.
Some analysts think these factors will all come to a head with a monster stock market crash in July. Whether or not that plays out, we are definitely approaching a level of complacency and exuberance in the stock market.
Don’t be surprised if we see a little cooling off and a return to reality for some stocks.
Last modified: September 23, 2020 1:59 PM