(Bloomberg) — The buy-anything mania that greeted Donald Trump’s election is cooling in the tried-and-true world of stocks and corporate credits. But on the speculative edges of Wall Street, the risk-taking frenzy is only increasing by the day.
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Heavy trading – and big price moves – in everything from crypto to exchange-traded funds was the story in a week when swings in the S&P 500 and Nasdaq 100 finally started to subside.
Ground zero for the casino crowd: the $140 billion complex of exchange-traded funds that track Big Tech stocks, Michael Saylor’s Bitcoin proxy MicroStrategy Inc., and more. Gamblers flock to vehicles that magnify profits and losses in indexes and companies, including the Magnificent Seven darlings. Leveraged single-name products traded $86 billion this week – a record.
It’s the latest frothy chapter in a banner year for risk assets, thanks to the booming economy and Trump’s election promises — no matter how long it takes for the Federal Reserve to cut rates.
The gains have fattened investment accounts just in time for the holiday shopping season. But at this rate, gambling spirits are high enough to give market pros pause.
“This euphoria is rampant speculation, on par with the 2000 peak,” said Michael O’Rourke, chief market strategist at JonesTrading. “These levels of momentum and revenue are difficult to sustain over an extended period of time.”
The gyrations are slowing in the less exotic assets. While the S&P 500 rose a healthy rate — 1.7% this week — this was the smallest move since before Election Day. Daily changes in 10-year government bond yields have averaged less than 2 basis points since November 14, compared with more than 7 basis points in the previous two weeks.
No corner of the hyped-up ETF world saw more action this week than funds focused on MicroStrategy, the Saylor software company that has transformed into what amounts to a pure-play bet on Bitcoin. Two firm-based hedge funds saw combined inflows of $420 million this week, amid a 24% rise in the underlying stocks.
The popularity of the two funds has led some market observers to point to a leveraged buying frenzy. It goes like this: Investor demand for the ETFs drives MicroStrategy’s price higher, allowing it to raise more money and further support Bitcoin itself. The world’s largest digital token is up more than 40% in November alone and climbed every day this week to get within a few hundred dollars of $100,000.
Matt Tuttle, CEO of Tuttle Capital Management, which manages one of the funds, says he bought a slew of MicroStrategy shares this week through his leveraged ETF. Its market makers have had to buy more shares to cover their positions. “Then look at all the retail investors buying options on MicroStrategy – on and on and on,” he said. “It can get pretty crazy.”
Products like these are an increasingly formidable market power in their own right, with assets reaching $140 billion. Attention has been drawn to this because of the rebalancing mechanism in the futures markets, which some argue amplifies movements in the underlying assets.
The impact on market movements is also unprecedented. Nomura Holdings Inc. estimates that leveraged ETFs bought $2.1 billion worth of U.S. stocks by the end of the day Thursday — the most on record. The trading of these types of single-name products, which are usually linked to names such as Nvidia Corp., Tesla Inc. and MicroStrategy, rose to a record this week, according to data compiled by Bloomberg Intelligence’s Athanasios Psarofagis show.
“Daily rebalancing of leveraged ETFs, whether to amplify the returns of ETFs or individual stocks, can exacerbate underlying asset volatility, especially if large moves occur daily,” said Daniel Kirsch, head of options at Piper Sandler.
Of course, leverage – and investor euphoria in general – threatens to hit the bulls as easily as it has helped them in their recent search for risky assets. For now, there are no signs that investors are willing to reduce exposure to risky assets.
“Equity allocations are the highest after the financial crisis, especially in the US and especially in the technology sector. We see no sign of them unwinding these positions,” said Marija Veitmane, senior multi-asset strategist at State Street, who favors high-end tech names.
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