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Photo illustration by The Globe and Mail

The bull, it seems, has gone berserk.

What had been a relentless but mostly orderly rise in stock prices since last spring has given way to a riotous new phase of the bull market, fuelled by frenzied trading among the growing ranks of small investors and rookie day traders.

Over the last couple of weeks, an army of retail investors has latched on to a bizarre assortment of companies that had been left for dead by the professionals, setting off a cascade of turmoil through financial markets that has astonished the investing establishment.

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The spectacle surrounding such formerly beat-up stocks as GameStop Corp. , AMC Entertainment Holdings Inc. and BlackBerry Ltd. , seemed to come out of nowhere. But the retail investing movement that set the whole episode in motion has actually been building for several months, fuelling concerns about frothy stock valuations in the process.

Since the COVID-19-induced market crash started nearly a year ago, a once-unfathomable volume of monetary and fiscal stimulus has provided a steady supply of adrenaline to revive financial markets.

Miniscule interest rates have made the stock market the only game in town. It’s hard to make decent returns with an acceptable level of risk almost anywhere else. And with the market clearly pricing in postpandemic gains in the economy and corporate earnings, stocks are on a run for the ages.

Money managers weigh on on the latest market mayhem

When losing is winning: Shares of unprofitable companies soar

The real victims in the GameStop madness are the pension funds, not the hedge fund bosses

Since markets bottomed last March, the S&P/TSX Composite Index, the Canadian benchmark, is up by 54 per cent. In the U.S., the S&P 500 Index has gained 66 per cent, while the tech-heavy Nasdaq Composite Index has climbed 91 per cent.

It’s getting harder to ignore the signs that speculative excess has inflated the bubble in stocks. The IPO market is red hot, social media platforms are teeming with stock-market banter, investor sentiment indicators are off the charts and penny stocks have caught fire.

The potential to rack up enormous returns incredibly quickly in a fast-moving market has proved a powerful lure for would-be traders, who have flocked to discount brokerages by the millions during the pandemic.

With time to kill and cash to burn, many have found a lucrative pastime in day trading. A variety of discount brokerages offer extraordinarily easy access to markets, many of the firms charging zero commission on trades, while online platforms and smartphone apps enable fast trading and real-time portfolio tracking.

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Doubling down their market exposure, retail traders have increasingly turned to more sophisticated and risky techniques, such as trading derivatives and taking on margin debt. Those activities tend to amplify the upward pressure on the stock market, which then encourages more risk taking, creating a classic positive-feedback loop.

“When your teenaged cousin living in the basement starts talking about trading stock options, that is usually the sign of a market bubble,” said Jason Del Vicario, a portfolio manager at Hillside Wealth (iA Private Wealth) in Vancouver.

“There are just crazy amounts of speculative interest in the market right now. The last time we saw this was in 1999 and 2000. Nobody cares about valuation. It goes up, so you buy it.”


Things could get much crazier still. While U.S. stocks in particular are, by some measures, more richly valued than any time since just before the dot-com bust, high valuations are at least partly justified by ultralow interest rates and bond yields. Perhaps most importantly, with the pandemic’s current wave ravaging much of the world, there is little chance of policymakers slowing the flow of stimulus any time soon.

One of the defining characteristics of pandemic-era finance is the divergence of the stock market from what has been happening in the real world. Long before vaccines started being jabbed into shoulders, investors appeared willing to look across the valley of death to a return to normal life.

So, when a handful of marginal, has-been and near-bankrupt companies saw their stocks capture the imagination of the retail masses, sending their share prices into the stratosphere, it seemed like just another sign of the market’s detachment from reality.

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It all seemed to start with GameStop. Coming into 2021, the struggling video game and electronics retailer had a market value of just over US$1-billion, and a share price of less than US$20. It was one of the most heavily shorted stocks on the market, meaning Wall Street was betting on the share price falling further. GameStop had largely failed to evolve into e-commerce, and as a result, missed out on the boom in demand for video games from consumers stuck at home.

Then, a vast congregation of retail investors who had connected through investing forums on Reddit and other social media co-ordinated an effort to lift GameStop’s share price, which put pressure on hedge funds betting against the company. Short sellers borrow shares, sell them and then buy later in the market to cover their short position – hopefully at a lower price, which will yield them a profit.

But as GameStop shares surged, facing rising losses on their positions, many short sellers were forced to unwind their bets by purchasing at higher prices. That added demand lifted the stock further, which attracted even more investor interest, and not just from the retail set. Trading in GameStop peaked at well over US$20-billion worth of shares traded daily last week, suggesting big investors also got involved.

By mid-week, GameStop was the most traded stock in the world, its market capitalization swelled to US$24-billion and some big U.S. hedge funds that had shorted it were teetering on the brink of collapse.

For many market observers, there was a certain satisfaction in seeing hedge funds on the losing end of a manoeuvre torn from their own playbook. “To have these hedge funds, who consistently manipulate markets within the gray areas of the law, to have that flipped back on them, I kind of get a kick out of that,” Mr. Del Vicario said.

The Reddit crowd was triumphant. It followed the same game plan for other heavily-shorted names, such as struggling cinema chain AMC, which saw its share price rise by 800 per cent in two weeks up to Wednesday’s close of trading. BlackBerry also got swept up in the retail investing mania, driving the Waterloo-based company’s shares to their highest level since 2011.

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Penny stocks outperform

Canadian stock moves year to date by share price

<$1

$1-$2

$2-$3

$3-$4

$4-$5

$5-$10

$10-$20

$20-$50

$50-$100

>$100

0

2

4

6

8

10

12

14

16%

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: refinitiv datastream

Penny stocks outperform

Canadian stock moves year to date by share price

<$1

$1-$2

$2-$3

$3-$4

$4-$5

$5-$10

$10-$20

$20-$50

$50-$100

>$100

0

2

4

6

8

10

12

14

16%

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: refinitiv datastream

Penny stocks outperform

Canadian stock moves year to date by share price

<$1

$1-$2

$2-$3

$3-$4

$4-$5

$5-$10

$10-$20

$20-$50

$50-$100

>$100

0

2

4

6

8

10

12

14

16%

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: refinitiv datastream

Combined with the ease of modern trading platforms, social media has given the retail investing community the means to flex its muscle in a way markets have never experienced before. “We’ve seen the same thing in politics,” said Lisa Kramer, a University of Toronto finance professor. “Social media platforms give people a voice, often anonymously. And we’re seeing the power of these platforms play out in unexpected ways.”

But powerful bull markets have a way of masking the risks of investing. With most stocks on the rise, many new entrants are rewarded with big gains. Investing forums have been full in recent days of users posting screenshots of their brokerage accounts, showing off six-figure gains on paper. As was seen during the dot-com boom two decades ago, mom-and-pop investors can easily get fooled into thinking they can trade like the pros.

“It’s really tantalizing when you’re a novice investor to think that you’re really good at this,” Ms. Kramer said. “You buy when it’s going down, sell after it goes back up, rinse and repeat. And if you haven’t been through market cycles before, you haven’t been burned and you haven’t learned those lessons.”


Dan McDermitt has watched the emergence of internet-based retail trading up close. The 32-year-old from North Carolina runs a company called The Chart Guys that livestreams day trading on YouTube and sells research and education materials to retail traders.

He began dabbling in penny stocks a decade ago, and launched the Chart Guys in 2015 to capitalize on the booming interest in marijuana stocks. Since then, he has watched retail investor enthusiasm wax and wane – for cannabis, bitcoin and other trendy sectors – depending on asset prices.

The recent arrival of zero-fee trading, now offered by many U.S. discount brokerages and in Canada, by WealthSimple Trade, supercharged the retail day-trading world. Instead of trading once every few days or weeks, retail investors can now trade four or five times a day at no cost.

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For many of these traders – mostly men aged 20 to 35, according to Mr. McDermitt – there is little interest in what the companies behind the stocks actually do. “I’ve always viewed markets as a video game, and I think millennials are viewing it that way as well,” he said. “It’s just flashing numbers on a screen. They don’t care about anything else aside from that momentum.”

And, of course, the more retail investors get in on the action and pile into hot names, the more they add to the momentum. The big U.S. online brokerages have reported record-breaking activity over the past year.

Charles Schwab, which last year merged with TD Ameritrade, recently reported that its busiest day in the fourth quarter saw clients trade 7.8 million times. Since then, the average trading day up to mid-January is running at more than 8 million trades.

goldman sachs non-profitable

technology index

The Non-Profitable Tech basket consists of U.S.-listed companies in innovative industries. These stocks

have shot upward since the start of the pandemic.

400

360

320

280

240

200

160

120

80

2017

‘14

2015

2016

2018

2019

2020

‘21

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: bianco research llc

(via bloomberg)

goldman sachs non-profitable

technology index

The Non-Profitable Tech basket consists of U.S.-listed companies in innovative industries. These stocks have shot upward since the start of the pandemic.

400

360

320

280

240

200

160

120

80

2017

‘14

2015

2016

2018

2019

2020

‘21

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: bianco research llc (via bloomberg)

400

goldman sachs non-profitable technology index

360

The Non-Profitable Tech basket consists of U.S.-listed companies in innovative industries. These stocks have shot upward since the start of the pandemic.

320

280

240

200

160

120

80

2017

‘14

2015

2016

2018

2019

2020

‘21

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: bianco research llc (via bloomberg)

In Canada, investors opened 1.7 million new accounts with online discount brokerages in the first three quarters of 2020, according to a report by the consulting firm Investor Economics. That’s a 159-per- cent increase over the same period in 2019. Over that time, the number of trades executed on those platforms doubled.

Emboldened by big returns, retail investors have turned to riskier tools that use leverage to try to magnify their gains, and, in the process, their influence over stock markets. Call options, for example, involve placing a bet on a stock rising above a specific price within a particular time period. If that bet pays off, the gain can be upward of 10 times greater than simply investing in the underlying stock, depending on the terms of the option contract. If the stock stays below that price, the investor loses the entire amount.

Options trading is traditionally the purview of large investors using them to hedge portfolios. But these days, anyone can do it. “If I want to go trade options, as an institutional client with a giant balance sheet, I’ve got to fill out a diligence questionnaire with an institutional broker saying that I have an understanding of derivatives,” said Daniel Schlaepfer, chief executive of Select Vantage Inc., a Toronto-based proprietary trading firm that employs day traders. “Now you have some kid who just clicked on the Robinhood app and he’s trading derivatives. It doesn’t make any sense.”

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Derivatives trading by small investors has grown steadily since free trading was adopted by many discount brokerages a year and a half ago. Call option trading attributable to individual investors has risen over that time from about 2 per cent of the total volume on the New York Stock Exchange, to nearly 10 per cent – an all-time high. “We saw a very similar phenomenon in the late 1990s,” said Adam Butler, chief investment officer at ReSolve Asset Management in Toronto. “It’s typically associated with a period of intense speculative fervor.”

The market is also flashing several other signs that investors are aggressively chasing returns. Margin debt, which involves traders using part of their portfolio as collateral in order to invest borrowed money, has soared in recent months as markets have moved higher. By the end of December, margin debt tracked by the U.S. Financial Industry Regulatory Authority hit a total of US$800-billion – a 63-per-cent increase in just nine months.

At the same time, riskier pockets of the market, such as penny stocks, are attracting heavy investor attention. On one trading day in mid-January, six microcap stocks, including pet medicine company Zomedica Corp., accounted for nearly one-fifth of total U.S. trading volume, according to data from U.S. brokerage Themis Trading.

In Canada, the year started with the tiniest stocks leading the market. Stocks priced at less than $1 returned 16 per cent over the first three weeks of the year, according to a note by Martin Roberge, a portfolio strategist and quantitative analyst at Canaccord Genuity. Over that time, the S&P/TSX Composite gained just 2.8 per cent. “Undoubtedly, there are signs of a speculative mindset in the market. This is what could be called the stage of euphoria in the cycle of investor emotions,” Mr. Roberge wrote.

Small Trader Call Option Purchases

As percentage of NYSE volume

10%

9

8

7

6

5

4

3

2

1

0

2000

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: bloomberg

Small Trader Call Option Purchases

As percentage of NYSE volume

10%

9

8

7

6

5

4

3

2

1

0

2000

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: bloomberg

Small Trader Call Option Purchases

As percentage of NYSE volume

10%

9

8

7

6

5

4

3

2

1

0

2000

‘02

‘04

‘06

‘08

‘10

‘12

‘14

‘16

‘18

‘20

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: bloomberg


There’s no telling how long that stage might last, however. And several powerful fundamentals are on the side of the bulls.

Most U.S. and Canadian stock market valuations are still well below their peaks in previous bubbles. This time around, the market also has a powerful backstop in the world’s central banks and treasuries.

To stimulate a global economy trounced by the pandemic, central bankers around the world slashed short-term interest rates to near-zero, and bought trillions of dollars’ worth of bonds to try to keep longer-term interest rates down.

The low-rate environment has prompted investors to switch from bonds into riskier equities to try to earn better returns. Rates are expected to stay low for the foreseeable future. Last week, the Bank of Canada repeated that it expects to keep its key policy rate at the “effective lower bound” of 0.25 per cent until 2023. Other central banks have given similar guidance.

While markets may be frothy, and the risk of a correction rising, the needs of the economy remain paramount so long as the pandemic rages on, according to Tobias Adrian, director of the International Monetary Fund’s capital markets division. “We do not believe we are anywhere close to the point where policies should be tightened,” Mr. Adrian said in a news conference last week. “Until the medical issues have been solved, we strongly advise our membership to continue the substantial monetary and fiscal support.”

Assuming policy makers take that advice and stay the course, investors big and small will effectively be encouraged to take on risk. “It’s a culture of fast, easy money,” said Mr. Del Vicario, “and I can guarantee you, it will not end well.”

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