As ever so often this is the million dollar question. We are certainly observing excesses in various corners of the market. Such as most recently, the Reddit x Robinhood gang (#yolo), who are blowing Hedge Funds out of the water by means of short/ gamma squeeze torpedos. Those coordinated manoeuvres appear to focus on a small number of counters but have pushed up option trading volumes to multi-year highs.
We hence do not see wide-spread excesses a la 1999 yet but more contained bubbles that are bound to burst and hurt some investors in the process – a number of Hedge Funds on the short side of the #yolo-traders are indeed licking their wounds already.
Could this lead to a market-wide meltdown?
At least, the frequently referenced ‘systemic’ risk of margin loans on the back of option contracts does not strike us as an obvious trigger. Since #yolo-traders are long call options, losses are limited to those premiums times the margin loan leverage. This setup is certainly preferable to riskier levered short positions, which do not seem to be accessible at size through the retail broking platforms.
But what about those sky-high valuations?
The end of Jan’21 valuation snapshot does indeed look stretched. Growth-adjusted revenue multiples of tech / high-growth stocks have increased by another up to ~50% in the last 3 to 4 months. But there is also significantly more certainty available today (e.g. US presidency, size range of fiscal stimulus). So far this seems to have offset some of the reflation upward pressure on treasury yields. Let’s hence hope that we can continue walking the tightrope at those stretched valuations. #famouslastwords