Sparkling trade in bankrupt firms, penny shares signal decline

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The vehicle is inactive at the Hertz Rent-A-Car parking lot at San Francisco International Airport on April 30, 2020 in San Francisco, California.Justin Sullivan | Getty Images

Sparkling price movements in the stocks of bankrupt companies, an increase in the number of bullish investors and a sharp increase in the activity of small investors in stock options are all signs that the stock market may have gone too far , too fast.There was even a big rally in stocks trading at less than $ 1 per share, which generated an average gain of almost 80% last week.

With the S&P 500 at over 45% of its lowest, analysts have seen signs of overbought the market and may be ready to rest. But strong market gains are also a magnet for some retail investors, who feel they haven’t been invested enough, and others who are finally starting to trust the return of the market.

“You now have a sparkling retail behavior in addition to a tense feeling from professional investors, and that is certainly a warning sign,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “Is it really important today, or is it important in two weeks? But from a strictly contrary point of view, it must be a red flag. It does not make a long-term statement. He’s not telling you it’s the end of the bull. He’s just telling you right now, right now, there are a lot of speculative behaviors that should be taken care of in the short term. ”

The stocks slipped sharply at the start of the session Thursday as some of the foam started to relax. Hertz lost 13% Thursday morning after falling 39% on Wednesday.

Boockvar said Investor’s Intelligence data now shows a reading for bulls at 56.9%, down from 53.5% last week, the highest since January and even more than 54.7% when the S&P has reached its highest historical level in February. Bears fell to 22.5% from 22.8% last week and 41.7% in March. The gap between bulls and bears at 36.3 is now the widest since mid-January.

Option trading, bankrupt companies

According to Sentiment Trader, traders of small lot options are in a “frenzy” and their activity also overshadows the volume of transactions at the highest in the market in February. Sentiment Trader points out that the smallest traders, with a volume of 10 contracts or less, bought to open 7.5 million call options on stocks at the height of the market in February. This week, they bought 12.1 million similar contracts.

Add to this a rather wild trade in the shares of bankrupt companies like Hertz and Whiting Petroleum. The Hertz stock hit a low of 40 cents on May 26, four days after it went bankrupt, but its stock has peaked at $ 6.25 since then. On Wednesday, it fell sharply to $ 2.52 per share, a drop of 40%. Whiting was also hit hard on Wednesday, as was bankrupt retailer J.C. Penney.

“There’s always speculation, hot spots, hot spots in the market,” said Jeff Rubin, director of research at Birinyi Associates. “In every bull market, there has been a period of speculation which, looking back, seems stupid. But Rubin said the sparkling action didn’t necessarily have a warning.

“Two years ago, everything about cryptocurrencies was super hot, and after that it was everything about pot stocks that were super hot,” said Rubin. He also mentioned Pets.com, the poster child for bubbling internet stocks in the late 1990s that no longer exists.

The Citadel Securities Institutional Equity Derivatives team, in a note obtained by CNBC, studied the 29 stocks in the Russell 2000 small-cap benchmark with a share price of less than $ 1. In five trading days until Monday, the group grew by an average of 79%. Denbury Resources, Noble Corp. and Palatin Technologies are among the stocks that traded at less than $ 1 per share in the Russell 2000.

“All of this is tantamount to what appears to be a short-term retail frenzy that has reached exceptional proportions,” the Citadel derivatives team said in the note.

“Not easy to play”

Retail investors would have found cheap prices amid the rubble of the March sale. The airline industry, up 45% last month, had been depressed, with American Airlines and other single-digit traders. These investors would have seen their money more than double.

Some strategists have said that it appears that individual investors are getting caught up in the “bankruptcy trade.” Others have said that high frequency traders, raking the market for opportunities, may also have focused on these stocks to capture their dramatic percentage moves. Bankruptcy actions can end up worthless.

“There are really two types of people who invest in these kinds of things. People who are downright speculative and those who are specialists who have done the math and understand the risk for stocks and bonds, ”said Ed Keon, chief investment strategist at QMA. “You also mostly see this type of investor on the bond side rather than the equity side. There are those who do it right. It is a specialized game and it is not easy to play. ”

Keon said the fact that more people are at home because of the coronavirus shutdown could mean they have more time to look around the market than they would normally have in the office. “They may have a little more time to look at their wallets. Some people may speculate in different corners of the market. This is generally not a good sign, “he said.

“Remember in 1999 you were going to a cocktail party, and it seemed like everyone was buying tech stocks on the sidelines, which was fantastic for a while,” said Keon. “There are always fools who take a leaflet on a risky investment, but it seems to be more intense if the market goes up. ”

Keon has become more cautious in the market, which he considers overvalued by certain measures. Investors venturing into the riskiest areas may have had good returns on the airline rebound and other reopening games. “They made money and that encouraged people to do it. It’s a good idea until it doesn’t, “said Keon.

A measure of value, the price / profit ratio of the S&P 500 over future profits is more than 22 times. The long-term average is less than 20.

“We are not super bearish. There is a lot of momentum. We are making progress on the disease. We are making progress on the economy, “said Keon. “We are looking at different evaluation measures. ”

Katie Stockton, founder and managing partner of Fairlead Strategies, said that for investors who play bankrupt stocks, neither Hertz nor Whiting Petroleum show any evidence of being able to maintain their earnings. Stockton, technical analyst, said she saw no confirmation in the charts.

“For me, the breakouts must always be confirmed, not just in terms of price but in time,” she said. “What we saw were these very quick rallies for these bankrupt companies. There is not enough to suggest that they last. ”

She said Hertz had exceeded its 50-day moving average but failed to maintain it. “This does not confirm a market breakthrough or a medium-term dynamic. “

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