High market risk cannot stop the speculative frenzy. Bitcoin and meme fever are rolling

Author: Zhitong Finance

This week, the five-day rise in U.S. Treasury yields has curbed the post-election stock market frenzy, but the speculative edge of the market is quite different. Bitcoin and its peers continue to set new highs in speculative enthusiasm, while a series of niche cryptocurrencies and assets related to Elon Musk have also soared. However, the performance of traditional risk assets is relatively bleak, with the S&P 500 ending a three-week winning streak and market breadth deteriorating, while Bitcoin and a series of suspicious meme tokens are going against the tide. Small investors continue to dominate the market, and signs of overexpansion in the market are emerging. Goldman Sachs' risk position and sentiment indicators have reached their highest level since 2018. Wall Street has held off on making big bets before the Federal Reserve's policy meeting next week, and most economists predict that the pace of monetary easing will slow down next year.

Specifically, U.S. Treasury yields jumped 24 basis points this week, the largest increase so far this year, but it did not stop the enthusiasm of speculators. Bitcoin rebounded quickly after a brief drop below $95,000, rising for the sixth consecutive week and driving a group of suspicious meme tokens to soar. Meanwhile, Michael Saylor's MicroStrategy Inc.'s stock price was pushed above $400, and the market value of a crypto token called "fartcoin" also soared to more than $700 million. These phenomena highlight the endurance of intraday traders and the speculative atmosphere in the market.

In terms of traditional risk assets, the gains of major U.S. stock indexes this week were the smallest since Trump's re-election, with the S&P 500 falling 0.6%, ending a three-week winning streak. Morgan Stanley's long-short basket tracking momentum stocks fell nearly 3.5% in the past five days, and the Russell 2000 index and the index of unprofitable technology companies both fell nearly 3%. In addition, market breadth has also deteriorated, with less than half of the index components trading above their 50-day moving averages. The largest long-term Treasury ETF experienced its worst week this year, falling more than 4%.

The dominance of small investors in the market continues to be evident in the volume of trading on over-the-counter trading venues. In particular, trading platforms operated by stock wholesalers, such as those that serve retail customers such as Robinhood Markets Inc., have accounted for more than 50% of trading volume and recently reached an all-time high.

Meanwhile, nearly all of Elon Musk's stocks have risen sharply, with Tesla Inc.'s stock price rising another 12%, with a market value of more than $500 billion since the election. A closed-end fund called Destiny Tech100 Inc. has also soared more than 500%, partly due to its holdings in Musk's privately held SpaceX.

The market remains dynamic, but its preferences are becoming increasingly picky. Without further catalysts, marginal stocks are more vulnerable to blows.

Signs of over-extension in the market have also emerged, with a Goldman Sachs Group Inc. risk position and sentiment indicator just reaching its highest level since 2018, with more than half of the indicators at significantly high levels. Similar readings have also appeared before the pullback. It is reported that the indicator tracks fund flows in various fields, from stock futures to bullish stock options.

Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, said that although macro data has only improved slightly at present, Goldman Sachs' overall position and sentiment indicators have reached 70%. Historically, similar high positions and sentiment indicators indicate that the speed of stock returns is limited.

Wall Street held off on big bets ahead of the Federal Reserve's policy meeting next week, with policymakers expected to push for a quarter-point rate cut.

Views were not unanimous, however, with Deutsche Bank and BNP Paribas predicting the Fed will take no more action this year. The pace of monetary easing next year is also expected to slow more than officials had forecast three months ago, with most economists predicting just three rate cuts in 2025.

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, said while a rate cut in December was part of risk appetite, it might not be enough for stocks to continue to rise.

"Unless Powell sounds very dovish, I don't think it's going to be a big catalyst in the near term," Suzuki said. "But it's providing some downside support for the market."