• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing

This Market Now Belongs to Penny-Chasing Wanna-Be-Millionaires

This seems awfully similar to the 2000 tech boom when everyone was a genius being long. What could possibly go wrong?
By MALEEHA BENGALI
Feb 12, 2021 | 11:17 AM EST

With all this extra liquidity that is meant to jolt the U.S. economy out of its Covid induced recession, it seems all the free money and stimulus checks is finding its way into hands of bored stay-at-home millennials and gen-Zs who figured out that since stocks can never go down, might as well find the cheapest stock out there and hope it rallies up 100%+, like GameStop (GME) . Obviously, these traders can't afford to buy shares of Amazon (AMZN) , or the large caps, as that would require too much capital upfront, they have resorted to chasing penny stocks like Saddle Ranch Media  (SRMX) that exploded up 3800% in just two weeks. This is but just one example of the ludicrousness of this market, where the name of the game is to find the cheapest most illiquid stock, get a group or retail army day-traders to push it on social media and get a buzz going. This is exacerbated by buying upside call options on these stocks, as they can position themselves 100x more for the same price! Without any consideration of the risks, their aim is to squeeze the shorts, in this case Hedge Funds who hold short positions for "fundamental" reasons. There is a reason why penny stocks are called that. They surely have no fundamentals nor growth or cash or earnings. To see these stocks move up and down 100% in a day is merely absurd.

This is the state of the market these days, where options open interest on cheap illiquid stocks is exploding to the upside and volumes on the larger index, S&P 500 and its names, are falling. The big boys seem to be on the side-lines observing the madness, this game is being played by a bunch of liquidity hungry wanna-be-millionaires. Of course, the market has rewarded them for their decision making, so they can't be to blame. The Fed can! Those of us old enough to remember past exuberant cycles, this seems awfully similar to the 2000 tech boom when everyone was a genius being long. What could possibly go wrong?

As the Fed's balance sheet keeps growing, now at $7.44 trillion and counting, with hopes of the new $1.9 trillion fiscal stimulus coming to pass as Treasury cash balances draw down, the market is well supported no doubt. Inflation according to the Fed is nowhere close to the 2% number they are targeting as they have conveniently taken out all the inputs that actually matter. One just needs to look at the breakeven inflation rates in the market suggesting 2.5% or more compared to the 1.4% CPI print we just saw. The Fed knows no other way but to keep its foot on the pedal till it gets the desired inflation, or growth, whichever comes first. But what if we get the inflation and not the growth? This is something any central banker fears and is hoping will not come, but given the state of the recovery of the economy, it seems like a real possibility.

U.S. bond yields are rising on the supposed recovery hopes. As yields move higher, investors are loading up on the reflation trade blindly. But lower yields and rates have been one of the biggest reasons that asset markets have been supported over the past decade. If yields move above 1.2% and break its long-term downtrend, there could be a messy adjustment period. But no one is prepared for this or thinks it can happen. We can keep moving higher until something snaps, but drawdowns can happen, especially when there is so much leverage in the system as we have now.

The market is pinned to the key 3900 level in February. Thanks to the February open interest gamma expiration coming up next week, this is giving investors a false sense of illusion of support. It is pinned for a reason as dealers need to sell above strike and buy below to keep risk flat. The beauty of derivatives and their real power! With so many signals flashing red, it would be wise to take a step back, avoid chasing four-letter tickers trading less than a dollar, unless you want to be the last man standing when the music stops.

(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Maleeha Bengali had no position in the securities mentioned.

TAGS: Short-selling | Bonds | Federal Reserve | Investing | Markets | Penny Stocks | Stocks | Trading

More from Investing

Can Generac Generate Enough Technical Power to Rally?

Bruce Kamich
Jun 29, 2022 11:55 AM EDT

Sometimes the fundamentals and technical indicators are on the same page and sometimes they are not.

Carnival Traders Are Voting With Their Feet

Bruce Kamich
Jun 29, 2022 10:38 AM EDT

Let's review the charts and indicators.

Bed Bath & Beyond Goes From Bad to Really Bad: Here's How to Trade It

Stephen Guilfoyle
Jun 29, 2022 10:30 AM EDT

BBBY just released the firm's first quarter financial results. It reads like fiction.

Bearish Sentiment Is at Decade Highs -- And That's Very Bullish

Guy Ortmann
Jun 29, 2022 10:25 AM EDT

Support levels have held and need to stay in that condition.

Losses Keep Piling Up in 2022 for This Portfolio of 2021 Losers

Jonathan Heller
Jun 29, 2022 10:00 AM EDT

In past years the Tax Loss Selling Recovery Portfolio has performed pretty darn well versus the broad indexes; that isn't the case this year.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:56 AM EDT STEPHEN GUILFOYLE

    Stocks Under $10

    Check out what's going on in the Stocks Under $10 ...
  • 12:04 AM EDT PAUL PRICE

    Two Good Signs -- Especially for Small-Cap Investors

  • 12:10 AM EDT PAUL PRICE

    More Insider Buying in American Woodmark (AMWD)

    American Woodmark , which I've discussed here fr...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login