As we see parts of the market crumble, and crumble hard, we have to ask ourselves why was it so easy to gun so many sectors with so little capital? How were the day traders able to take certain stocks up so easily?
First, let's accept a couple of parameters. When you have millions of new investors coming into the market -- courtesy Robinhood, the younger-investor-focused brokerage house, but also because of zero commissions at other firms -- the money is going to go somewhere and it's not going into index funds. They aren't fun and they aren't get rich quick. And believe me, there were some get rich quick sectors.
Second, these new investors have no tolerance for high dollar amount stocks. The age of the split is over, because the big institutions pay by the share -- and if you divide Amazon (AMZN) by 10, you are going to pay 10x the commission that still owe. So, the big institutions have won on this issue, relegating these new investors to lower dollar amounts -- all the better to be able to push up with mass buying.
Third, the new investors only seem to know the equity side of the equation. I saw this when I first went to work at Goldman Sachs (GS) . I was working with Eddie Lampert -- yes he of Sears fame, but before that, of excellent arbitrage abilities -- and I remember one day he was dealing with a young hire and he told me that the person didn't know the difference between a stock and a bond. We laughed.
These neophytes don't know the difference between a stock and a bond.
Finally, they seem to be able to amass their buying power in the same names, which gave the stocks the impression of lasting moves. They weren't.
Notice, I am not talking about manipulation -- not that it would matter, because it's been years since the SEC brought those kinds of cases. I am talking about the desire to pick momentum stocks while they had momentum.
And where did they go?
First, they love stocks under $10. It's easy to see why. You can buy one hundred shares, the usual amount for the beginners until they taste victory.
Second, they loved the cruise lines. It makes sense if you don't know the bond side. There are only three of them: Carnival (CCL) , Norwegian (NCLH) and Royal Caribbean (RCL) . When you bet at the track, you are always looking for the trifecta. These stocks were per se trifectas, and given that they were all hammered down to low dollar amounts, they were ideal to gun. When they got to higher dollar amounts, real sellers surfaced, grateful for the opportunity, but then we saw the moves were based on quicksand and the stocks justifiably collapsed because of the burn rates of the cruise ships not being able to cruise.
They gunned the airlines for similar reasons. The companies raised equity. Their stocks were knocked down. They weren't reporting earnings. And institutions had cleared out. The stocks only ran out of steam when the institutions realized the travel numbers weren't coming back despite the re-opening of America. Business travelers had switched to Zoom (ZM) . Vacationers switched to cars and RVs. Not enough traffic. Bad numbers. Time for a fresh round of equity, so the institutions readied themselves for discounted created by natural selling and by neophyte fear.
Retailers fell to single digit levels. Again, attractive before the reopening. But now the reopening is upon them and we are going to see some awful numbers. The neophytes right now are running smack into real sellers, like those in Macy's (M) , who don't like the odds. Who can blame them? There's still suppliers and rent to pay. They come before the shareholder base.
Finally there were the oils, many of which had fallen to single digits because of the war of stupidity between the Saudis and the Russians that brought oil to minus $37. The long climb back created great opportunities for the young investors. Again, they lacked the discerning ability of those who can read a balance sheet.
Now the price of oil is coming down. Too much supply again, as the Permian got turned back on. This is the group that is most vulnerable right now.
Now it's over. What will they take up next?
If they borrowed money, probably nothing. If not, it's back to the remaining single digit stocks -- almost all of which make no sense at all, as no company chooses to have a single digit stock if it can avoid it. Most of these can't.