First Signs of FOMO in the Stock Market, Greater Fool Theory at Work

The US stock market is currently experiencing euphoria with 98% of S&P 500 stocks trading above their 50-day moving averages. Nasdaq composite is also now above 10,000 for the first time in history.

According to Citigroup’s panic/euphoria model, the sentiments are at their most “euphoric” since the dot-com bubble in 2002.

“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.”

But what or who’s exactly behind this rally?

Millennials meet Robinhood, Markets Boom

It’s the retail investors that have taken to buy everything which includes companies in Chapter 11 bankruptcy.

As we reported, Hertz’s stock prices skyrocketed after the company filed for bankruptcy. Back in March, only 3,000 users owned Hertz which has now catapulted to 142,000.

I'm literally watching a handful of small & microcap names that are too small to even mention…witnessing share prices that are like $5 each…and posting xxxx% gains because a handful of folks decided to print 100k shares of volume for a stock that trades 1k shares a day on avg

— Dominic Chu (@TheDomino) June 9, 2020

This risk-on attitude can be seen especially on Robinhood, a commission-free investing app popular with millennials. The app recently reached 13 million accounts, up from 10 million at the end of last year. Google search interest in the company climbed to record levels in March and though currently down from that peak, it’s still high.

My 20yo son, stationed on an airbase in Turkey, just called to tell me about all the guys on the base going around bragging about how much money they’ve made buying “one-dollar stocks” on Robinhood.

— Jesse Felder (@jessefelder) June 9, 2020

CNBC reported of such instances where millennials are making profits on beaten-down airline stocks, flipping their stimulus checks to nearly $10,000.

While young investors seem to have a prescient understanding of markets, billionaire hedge fund managers like Stanley Druckenmiller misjudged the equities’ comeback. He said the strong market performance “humbled” him and that he underestimated the power of the Fed.

Even legendary investor Warren Buffett sold his airline stakes during the pandemic that cost him $2.7 billion as airline stocks posted their best week.

This frenzy in the stock market is reminding people of the 2017 crypto bull rally.

My wife and I were having coffee in Starbucks in December 2017. No kidding, by the time we finished our coffee my #bitcoin position went up $30,000. https://t.co/AethCoRz9Q

— Timothy Peterson (@nsquaredcrypto) June 10, 2020

This also has crypto trader Cantering Clark wondering, “Why the hell don't these Robinhood traders come and buy some bitcoin? If HTZ can 10x in a few days then BTC can definitely 2x from here, come on.”

Robinhood allows buying and selling cryptocurrencies including bitcoin but in selected states and also doesn't support coin withdrawals.

What’s Next?

According to Goldman Sachs, most positioning indicators have become more bullish from extremely bearish levels in March. Also, the first signs of FOMO are being seen.

Typically it doesn't end well. Traders and speculators running rampant in a hot market remind of the dot-com crash of 1999.

Moreover, a lot of these millennials investors are putting in money in the stock market for the first time after witnessing the Federal Reserve printing millions of dollars to stabilize the financial markets.

According to Rabobank, Greater Fool Theory is at work here, “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.”