Wall Street is experiencing a surge in speculative trading reminiscent of the dotcom era and the COVID-19 pandemic period. According to Goldman Sachs, a new speculative trading indicator is flashing red after a remarkable few months, driven by a palpable sense of FOMO. Penny stocks are trading in the 98th percentile since 1990, while stocks with high enterprise value to sales ratios and unprofitable stocks are also seeing significant activity.
The use of call options has surged, with over 70 per cent of all options traded being calls. Bank of America reports that about 60 per cent of options activity in the US involves zero-day options, highlighting the appetite for short-term speculation. A basket of retail investor favourites has risen by 50 per cent since mid-April, and Goldman’s basket of most shorted stocks has soared by over 60 per cent, marking one of the most significant short squeezes in the last four decades.
Goldman Sachs’ Australian equity strategist Matthew Ross indicates that this phenomenon is not confined to Wall Street. Australian stocks with high short interest have jumped by 23 per cent, led by a sharp rise in mining stocks. Despite potential economic stimulus in China, Ross attributes the surge to a shift towards risk-on sentiment rather than fundamental factors. He notes that there’s little news flow to fully explain the magnitude of these moves, suggesting a broader pattern of speculative behaviour.
While this level of speculation might typically warrant a cautionary warning, Goldman Sachs’ analysis suggests that such spikes in speculative trading activity have historically led to above-average equity market returns in the near term. However, a two-year view indicates a higher risk of downturn. In Australia, the evidence is less clear, though the market tends to follow Wall Street’s trading patterns. Investors are betting on a continued positive trajectory, but the aggressive nature of this speculation could lead to a significant correction down the line.
