“Hey, you never know” was the catchphrase of New York State Lottery ads through much of the 1990s. An old friend in advertising who worked on another state’s lottery account once told me his creative team couldn’t get that line out of their minds, failing to improve upon the way it so perfectly captured the awareness of long odds that make the notion of winning that much more enticing. “I’ll probably lose – but what if I don’t?” Without belaboring a clumsy and reductionist analogy between negative-sum lottery games and positive-sum investing, the recent re-embrace of meme-stock trading, proliferating short-squeeze stampedes and the alt-coin crypto revival has that “Hey, you never know” flavor. And, frankly, the thing about markets is you truly never do know what stocks will work, or why, or how much good or bad news is priced in at a given moment. The best professional investors of all time get it right maybe 55% of the time, so why wouldn’t amateurs shoot for low-probability/high-payout bets? We’ve already been citing the rushing torrent of speculative adrenaline in racier, gamier stocks for weeks, and now we appear firmly in the “Anything goes” phase of this bull market. The question is whether to view this outbreak of frothy fun as a warning that the broader market has grown euphorically risky, or as a sort of “rationally reckless” impulse that can help energize an otherwise sturdy and poised bull market. An enormous proportion of last week’s trading volume was in zombie 2021-era busted momentum plays such as OpenDoor and GoPro , along with heavily shorted household names Kohl’s and Krispy Kreme . Last week JPMorgan calculated that the investor crowding into the most volatile and often lower-quality “high-beta” stocks has essentially never been more extreme over the past 35 years. The firm is also tracking retail-trader buying in high-short-interest stocks, now showing its sixth frenzied outburst since 2020. Such excitement has quickly drawn the tut-tutting of the spoilsports and voices of moderation, though I tend not to scold those playing these games. For one thing, this is a lot closer to how Wall Street started – a game of telephone among pods of speculators before the invention of the telephone – than is represented in any academic version of sober capital formation. For another, how would one expect profit-motivated, low-information traders to behave after the S & P 500 has been compounding at a 115% annual pace since April 7 and the Goldman Sachs basket of retail-favorite stocks is up 50% over that time? It’s possible for this activity to be both foolhardy for those participating and not particularly dangerous to the broader $60 trillion in U.S. market capitalization. It’s likely, for one thing, that many of those involved are in on the joke, to a large degree. They perhaps see a surge in social attention toward certain tickers or identify asymmetric advantage in stocks burdened by many complacent short sellers. Most will lose money and many will lose interest, and that’s ultimately how many buy-and-hold index investors are born. Measuring the speculation surge One thing for sure, this overheated activity is motivating market researchers to devise new, better-tuned analytical thermometers to measure it. Goldman last week introduced a Speculative Trading Indicator based that’s now in its sharpest three-month upswing ever outside the late-1990s tech mania and the original meme-stock/SPAC fever of 2020-2021. The indicator captures trading volumes in penny stocks, unprofitable companies and those with the most extreme valuations. Volume in penny stocks is now running in the 98 th percentile of all periods since 1990, and turnover in stocks with enterprise-value-to-sales ratios above 10 is in the 96 th , the firm says. (This harkens to a known lottery phenomenon called “jackpot fatigue” – a given level of payout fails to excite players after a while, requiring more juice to activate their interest.) Fascinatingly, similar rushes for the risky fringe of the markets have in the past had positive implications for S & P 500 returns over the ensuing 3-, 6- and 12-month periods, Goldman says, but beyond a year they have tended to lead to significantly worse performance. “The trend is your friend until the end when it bends,” indeed. 3Fourteen Research co-founder and CIO Warren Pies unveiled a new Daily Sentiment Composite last week as well, comprising ETF flows, options activity, systematic-hedge-fund behavior, surveys and more. It’s now above 70 on its zero-to-100 scale, with 60 being the threshold for “excessive optimism.” This dampens the outlook for market returns while the composite stays in the upper range. Pies, who is holding to a 6,800 year-end S & P target, nonetheless expects a tougher couple of months from here due to less demand from “automatic buyers” (corporate buybacks and volatility-targeting hedge funds); weaker seasonal patterns; potential cracks in the economic-growth narrative; and the aforementioned sentiment setup. Pies also goes deep on the broad-scale, society-wide “fear of losing ground” to the acceleration in assets that have run higher on what he calls “debasement” forces – persistent fiscal deficits and political pressure to lower interest rates that are benefiting stocks, real estate, crypto and gold, while undercutting housing affordability and lifting longer-term market-based inflation expectations. “In this new world, an increasingly large number of (particularly young) citizens believe that leveraged speculation is the only way to break out of the American caste system. It is no surprise that online gambling has boomed in this new era,” he says. “It is hard to blame the young speculators who have embraced financial nihilism.” It’s common for financial-wellness types to lament the way consumers of modest means spend on lottery tickets (more than $300 a year per capita in states that have lotteries), when they could build a cushion more safely by saving that money. But research shows that saving such sums is rarely enough to materially change a person’s financial reality, whereas the longshot windfall could. Similarly, we can talk to young people who trade short-dated stock options or leveraged ETFs or penny stocks about the power of long-term compounding and clockwork retirement contributions, but good luck having it penetrate when homes are out of reach for most and we’ve just seen trillions in crypto wealth pile up in a few years, as bitcoin was all the while derided (with good reason) as economically unnecessary. Financial guardrails being removed These are tidal shifts in societal behavior lapping around the edges of the capital markets. There’s a broader story to tell these days about the urgent removal of financial guardrails and the gradual buildup of structural excesses now underway: Congress is greenlighting stablecoins and blessing crypto-ownership expansions. Banks are being urged to lend to consumers against their crypto assets. Robinhood is tokenizing high-value private startups to let smaller investors own them. Regulators are reportedly close to lowering minimum-balance levels for so-called “pattern day traders” while opening 401(k) plans to alternative assets. The AI buildout boom is taking on financial leverage, with Meta Platforms and xAI tapping private credit to build data centers. Advocates for such measures can surely argue that the removal of frictional barriers is beneficial to enabling capital flows among risk takers, perhaps raising the economy’s metabolism. Still, it’s tough to make the case that U.S. capital markets – featuring the deepest credit markets and the world’s most stoutly valued equity indexes – have been stymied all that much by bureaucratic overreach. The peddlers of prudence will no doubt eventually find something in all this to say “I told you so” about, but who knows when. The implications will likely emerge sporadically over a span of years and are not particularly useful for handicapping the market’s immediate prospects from here. It remains notable that for all the wild action in the spicier parts of the market, the core of the equity complex has scarcely made a misstep in months. The furious springtime rebound rally has given way to a calm, low-drama grind – a “boring is bullish” mode. The S & P 500 was nearly static on multiple days last week, reflecting some groups cooling off and others playing some catch-up, a so-far orderly rotation that nonetheless bears monitoring. The benefit of the doubt remains with the bullish overall trend, even while the case for a tactical pause or retrenchment builds. Stock reactions to earnings have been slightly net negative for the companies reporting even as the aggregate “beat rate” has been expectedly high. The Nasdaq 100 is getting pretty stretched relative to its longer-term trend and has put in a significant multi-month peak in the second half of July the past two years. Arguably, the consensus is now a bit complacent regarding the potential impact of tariff outcomes, lulled by a slow-and-steady economy helped by a torrid tech capex binge. Valuation is not much of a tactical help, but I’ll note that Microsoft – an excellent measuring tool given it’s been near the top of the index and at the front lines of tech trends for more than a generation – is again trading above 33-times forward 12-month earnings. Its P/E has been no higher than 34 since the early 2000s, all in the past few years. Elevated, sure, and reflective of a market pricing in plenty of positives. But not exactly bubbly – the stock traded above 50x in the two years before the March 2000 peak of the tech mania, a time when the public intoxication with risk reached genuine historic extremes that the current speculative wave has not yet even closely approached.
Bull market enters the ‘anything goes’ phase. Should you follow?
