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GameStop Frenzy Signals Markets Are In Bubble Territory

By Investing.com (Haris Anwar/Investing.com)Stock MarketsFeb 01, 2021 09:47AM ET
www.investing.com/analysis/gamestop-frenzy-signals-markets-are-in-bubble-territory-200557677
GameStop Frenzy Signals Markets Are In Bubble Territory
By Investing.com (Haris Anwar/Investing.com)   |  Feb 01, 2021 09:47AM ET
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There are many ways to interpret GameStop's (NYSE:GME) epic surge in January. It can be viewed as a major battle between small retail investors and the big, establishment guns on Wall Street; it could also be seen as the democratization of investing when the trading proletariat who are active on social media, challenge the financial elite.

GME 300 Minute Chart
GME 300 Minute Chart

But Reddit traders chasing a handful of the most-shorted equity names are also a clear signal of an asset price bubble in markets after a period of historically low interest rates and unprecedented monetary stimulus to fuel the global economy during the pandemic.

Of course, there is no sure way to predict a bubble in the making for any asset class, but there are some fairly similar warning signs that emerge before the value of an asset inflates beyond its realistic worth. Charles Kindleberger, in his classic Manias, Panics, and Crashes, gave the necessary conditions: easy money, and an exciting narrative that will encourage people to invest.

The GameStop frenzy, which pushed the share price of this little-known mall retailer higher by 1,600% this month and forced some hedge funds to book massive losses to cover their short positions, couldn't possibly have happened unless the tens of thousands of average Joe day-traders involved didn't have easy access to liquidity and a lot of time to trade from their bedrooms. 

Along with the GameStop drama currently unfolding, there are many other signs that support the argument that markets are in classic bubble territory.

Look at the roller-coaster ride in cryptocurrencies and skyrocketing share prices of clean energy producers. Plus, of course, who could forget the eye-popping rally in Tesla shares (NASDAQ:TSLA) which vaulted more than 720% higher during 2020, while other, small players in the electric-vehicle market also were boosted.

Sell Signal?

The main force creating these bubble-like conditions are governments trying to fight national, pandemic-induced recessions through monetary stimulus. They have spent some $12 trillion in fiscal support alone during the pandemic, according to Bloomberg. At the same time the U.S. Federal Reserve is buying $120 billion of bonds monthly to keep borrowing costs low in the world’s largest economy.

Bank of America strategists warned last week that market excesses could trigger a correction in the first quarter of this year with their Bull & Bear Indicator closing in on a “sell signal.”

“D.C.’s policy bubble is fueling Wall St.’s asset price bubble,” said the BAC team, led by Michael Hartnett, writing in a note to clients.

“When those who want to stay rich start acting like those who want to get rich, it suggests a late-stage speculative blow-off.”

Analysts at Goldman Sachs said in a note that very high-growth, high-multiple stocks “appear frothy” and the boom in special-purpose acquisition companies (SPACs) is one of a number of “signs of unsustainable excess” in the U.S. stock market. The recent surge in trading volumes of stocks with negative earnings is also at a historical extreme, they said.

How should long-term investors prepare themselves, assuming the market is in bubble, or near-bubble territory? 

One straightforward, sensible way is to avoid highly speculative bets, such as GameStop.  Another course of action should be to stay away from the areas of the market which are frothy and consider investments that are not in bubble territory, such as financials and some top-rated industrial stocks. Adding exposure to  a large-cap dividend fund is another way to add stability and cut risks ahead of a possible market correction.

Bottom Line

It’s hard to predict the end-game on the GameStop, social media fueled mania. For long-term investors, this presents a warning sign that volatility might spike in the coming days, and it’s a good time to make smaller portfolio changes to moderate the risk. That means increasing exposure to low-volatility assets, boosting cash reserves, and adding assets that have a low or negative correlation with equity markets.

GameStop Frenzy Signals Markets Are In Bubble Territory
 

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GameStop Frenzy Signals Markets Are In Bubble Territory

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Comments (26)
Tyler Phillis
Tyler Phillis Feb 04, 2021 3:39AM ET
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Asset bubbles are misallocated resources that occur due to government intervention and regulation. Its not that hard ti predict the next one if you follow the money...
Ibrahim Asmar
Ibrahim Asmar Feb 03, 2021 1:16PM ET
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Do u feel Blackberry same of GME
Shane Gg
Shane Gg Feb 02, 2021 1:58AM ET
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We've all known it's been in a bubble since the last bubble popped.
Samui Lo
Samui Lo Feb 01, 2021 11:43PM ET
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Sure the price is vastly inflated and without the short squeeze narrative worth double digits max but I stopped reading at "little known mall retailer"
حسن زعبولا
حسن زعبولا Feb 01, 2021 7:36PM ET
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we have been in a bubble for a few years. and it's almost time for it to pop
Pupi Pi
Pupi Pi Feb 01, 2021 5:25PM ET
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Just hold the line, time works foe us!
James Ayala
James Ayala Feb 01, 2021 5:25PM ET
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All thise RH users who had GME in their account for a free share are now eating a free handout investment opprotunity.
Johnny Crash
Johnny Crash Feb 01, 2021 2:57PM ET
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GameStop drama? Seriously? I guess you meant to write GameStop success, right?
Stephen Corsaro
Stephen Corsaro Feb 01, 2021 2:27PM ET
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or it could be organized accelerationism.
Phil Kimmel
Phil Kimmel Feb 01, 2021 2:16PM ET
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The conditions for a cradh you listed are also the same conditions for a bull market 😳
John Hardy
John Hardy Feb 01, 2021 2:16PM ET
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I agree with your statement. Is there anyway you could put a similar article together.?
John Hardy
John Hardy Feb 01, 2021 2:16PM ET
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I agree with your statement. Is there anyway you could put a similar article together?
Aidan Huntington
Aidan Huntington Feb 01, 2021 2:11PM ET
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this is just like the 2008 housing crisis but on things other than housing ofc
Andy He
Andy He Feb 01, 2021 2:09PM ET
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Articles like that signals Investing.com is desperately looking for clicks...blablablaActually just saw the headline but didnt read the article.. stopped reading articles here long time ago... all hot air and zero substance
Jim Daley
Jim Daley Feb 01, 2021 2:08PM ET
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Time to drain the hedge fund swamp shorties. There’s a new kid on the block.
MD RahMan
MD RahMan Feb 01, 2021 2:07PM ET
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We already in bubble. My portfolio is down 50% since last week.
Shane Gg
Shane Gg Feb 01, 2021 2:07PM ET
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Go small cap and stay there. My portfolio is up 150% for the year.
Kim André
Kim André Feb 01, 2021 2:06PM ET
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using every trick they can to make us sell
Brett Forster
Brett Forster Feb 01, 2021 2:04PM ET
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GameStop shows that the stock market is not a perfect system.  Certain equities are in a bubble, but not the whole market.  Some stocks have not been this low since '16.   Analysts have been saying this for 20 years, but up goes the market.
Nicholas Young
Nicholas Young Feb 01, 2021 2:04PM ET
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I dont give a *****about gambling. Ya short because its gonna crash to 0
Oran Kedem
Oran Kedem Feb 01, 2021 2:04PM ET
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🦍🙌💎🚀
Nicole Rose
Nicole Rose Feb 01, 2021 2:03PM ET
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Bull ******lol and i shorted that garbabe
Peter Peter
Peter Peter Feb 01, 2021 2:02PM ET
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QE+ZIRP+unlimited gov stimulus=as good as it gets. Your article is trash.
David Smith
David Smith Feb 01, 2021 2:02PM ET
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Update: has been in bubble since March
Dusty Owen
Dusty Owen Feb 01, 2021 2:01PM ET
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Lol it doesnt signal a bubble. It signals a hedge fund made a bad bet and shorted more shares than were in existence lol.
Conrad Withrow
Conrad Withrow Feb 01, 2021 2:01PM ET
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Exactly. How can he call a 120%+ short squeeze a bubble? So BBBY GSX AMC AG NOK NAKD are bubbles? C’mon. Honestly, it shouldn’t be allowed to exceed 100% short float as it creates problems with clearinghouses. Short float and WSB have nothing to do with bubbles. It’s just an indicator of RH and other 0-fee platforms causing s massive surge in retail investing...which is actually massively bullish, not bearish.
Mehmet Dutlu
Mehmet Dutlu Feb 01, 2021 7:29AM ET
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Fed is responsible for all these asset bubbles and excess. The helicopter money landed in stock market as Joe daytrader was bored and gambled his dollar cheques in wallstreet.
LUCIANO GIUDICE
LUCIANO GIUDICE Feb 01, 2021 5:24AM ET
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So glad someone is teaching a lesson to the established financial institutions. GME event is not a sign of a bubble is just a reality check. To suggest that we are in a bubble and GME event happens because Mr. Joe day trader has too much money in his/her pocket, is an insult and shows how much people are willing to protect the establishment. By the way the same financial establishment that caused the credit crunch crisis of 2008/9.
Mein Ki
Mein Ki Feb 01, 2021 4:33AM ET
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what isit called that "some hedge fund"? elite? some goldman? some saches?
Ben Dover
Ben Dover Feb 01, 2021 4:29AM ET
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Smart people are playing with novice investor like a fiddle. This squeeze is now a elobrate pnd.
 
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