• S&P 500 historic rally driven by investors ignoring risks
  • Investing platform Robinhood reached 13 million accounts in May
  • Robinhood users are making risky buys like Hertz and Nikola
  • Market seeing 2002 dot-cum bubble levels of euphoria, says Citi

As of yesterday's close, 98% of S&P 500 stocks were trading above their 50-day moving averages, boosted by reopening hopes and the much better than expected jobs report. The S&P 500 has officially wiped out its 2020 losses, and other global markets have seen massive gains in two months. The MSCI All World Index trades at more than 20 times 2020 earnings, the highest level since 2002.

Citigroup’s panic/euphoria model is showing sentiment at the most "euphoric" since 2002 (dot-com bubble era). "We are concerned that thoughtful approaches are being overwhelmed by the need to at least keep pace with price moves," said the bank's analysts. "People are ignoring joblessness, trade friction, social unrest, and risks that loom including possible Covid-19 reinfections, the end of bonus supplemental unemployment checks and the upcoming elections." 

panic/euphoria
Source: Citi Research.

During this rally, retail investors seem to have been buying up everything including companies in Chapter 11 bankruptcy, and small traders are driving the speculative fervor by buying to open more call contracts in June than they did in February, before the pandemic. This risk-on attitude is especially visible when one looks at the activity on Robinhood, a commission-free investing app popular with millennials that is being openly mocked by older investors. It recently reached 13 million accounts, up from over 10 million at the end of last year. Google search interest in the company is at record levels this year. Daily average trades at other online brokers have also surged in 2020.

Robinhood
Source: Goldman Sachs.

Here are the top 10 stocks that saw the biggest increases in popularity over the last one day on the platform, according to Robintrack:

  • Hertz (HTZ) - car rental company, filed for bankruptcy on May 22
  • Nikola (NKLA) - electric truck maker, expects zero revenue in 2020
  • TOP Ships (TOPS) - Greek oil tanker company, penny stock
  • Oasis Petroleum (OAS) - oil and gas producer
  • American Airlines Group (AAL) - expects to cut management and administrative staff by 30%, domestic schedule down 55% yoy during July 2020
  • Invesco Mortgage Capital (IVR) - real estate investment trust
  • Direxion Daily S&P Oil & Gas Exp. & Prod. Bull (GUSH) - oil and gas ETF
  • Valaris (VAL) - offshore oil driller exploring bankruptcy
  • Delta Air Lines (DAL) - massive layoffs soon
  • Carnival (CCL) - cruise operator 

The chart below shows Hertz's stock price and Robinhood users holding it in their portfolios. Back on March 18, 3,000 users owned Hertz. This figure has catapulted to 142,000 today.

Hertz
Source: Robintrack.

Typically, when traders and speculators run rampant in a hot market, it doesn't end well. The dot-com crash of 1999 comes to mind. On the other hand, there are a lot of new market participants putting money to work in the stock market for the first time as they have witnessed the Federal Reserve throw trillions of dollars into the financial markets to stabilize them.

Could this be a classic example of the Greater Fool theory

"If everyone is holding stocks just to pass on to the next greater fool, and if the greatest fool is a central bank with infinite liquidity to buy them, then, yes, prices will keep going up," said a note from Rabobank this morning.