Small Traders Are Euphoric Beyond Anything Before

The amazing thing about this new crop of retail traders who are largely millennials is they never go away. They always come back for more. It doesn’t matter how much a stock falls or how much they lose on options, they come back like gambling addicts to a casino. As you can see from the chart below, small trader call buying is 22% of all opening volume which is a new record high. Speculation is higher than in the late 1990s because access to options trading has increased. Furthermore, we have social media and smartphones which make it easier to find ideas and execute trades. Just because it’s easy to make a move doesn’t mean you should. Overtrading can be a big problem. Have some mental stops that prevent you from going all in without proper due diligence.

The stock market is based on corporate profits, but speculation can turn any asset into a gamble temporarily. If a company trades at a triple digit PE ratio, it’s not really a bet on the business anymore. It’s a bet on a game-changing innovation which scales. In that sense, you can invest like a venture capitalist in a large cap company if there is enough optimism baked into the share price.

Speculation mean reverts hard. As optimistic as investors are now, they will be pessimistic when the speculation cycle ends. It’s tough to figure out when the cycle will turn because it’s irrational to begin with. Potential catalysts are weakness in tech stocks due to the economic reopening in 2021, an increase in the supply of stocks, and rising rates. Supply comes to markets that demand it. Every tech company that ever considered going public is doing so now that the market is favorable to them. The market keeps dropping its standards and supply keeps coming via SPACs as well as dilution through secondaries and stock-based compensation.

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