Several times I have commented about massive retail option call buying.  According to Bloomberg over the last 30 days an average of more than 22 million calls traded across US exchanges, a record.   Of this amount,18 million calls in sizes of 10 contracts or less were purchased, demonstrating the massive speculation that is taking place on the retail investor level.  Options were designed to hedge not for potential appreciation.

JP Morgan commented “this is a clear sign of froth and a speculative bubble.”   The Bank further stated the vast majority of the retail call buying has occurred in the largest capitalized issues, an environment that “could exacerbate any declines via gamma hedging as was the case in September’s 5.7% drop in the averages.”

Continuing with the above theme, it is widely accepted a full-blown mania is occurring in certain sectors or stocks.  Retail darlings such as Bitcoin and Tesla have soared about 37% and 20%, respectively this year but perhaps the most dramatic illustration of the current mania is that last Monday six stocks priced under $1 per share made up nearly a fifth of total US volume according to Bloomberg.


Nominally changing topics, Bloomberg opined Friday “the outperformance of mega tech companies may be behind us.”    The Newswire reported the equal weighted S & P 500 has outperformed the S & P 500 by 9 percentage points since early November, further stating “this pattern is typical when the economy is emerging from a recession and could last for years.”  Bloomberg utilized the October 1990 and 2001 as examples.  Each time the equal weighted S & P 500 outperformed for about 4 years.

Already the combined index weighting of the top five companies in the S & P 500, has retreated from a recent peak of 24% to 22% today, “a level last scene during the bubble with further declines likely.”

A reason for the decline is that Economics 101 suggests a company cannot persistently earn above average profits for a prolonged period of time because competitors will appear. Today the global backlash against the mega tech companies has reached the point that their near monopoly status is being challenged.  While there are some Democrats in the Congress are advocating the breakup of these mega companies, I think a greater risk is the end of future M & A that allows these companies to swallow potential rivals.

Speaking of earnings, fourth quarter earnings season commenced Friday.  Mega sized financials posted mix results.  However, I thought it was very significant that there was a decline in non-performing assets that permitted a decline in loan loss reserves.  A healthy economy requires a healthy banking system and to date it appears COVID has not produced the feared result of imploding loan portfolios.

What will happen this week?  Earning season accelerates.  How will the results be interpreted?  The economic calendar is comprised of several housing indicators, manufacturing indices and weekly jobless claims.

Last night the foreign markets were up.  London was down 0.03%, Paris up 0.01% and Frankfurt up 0.25%.  China was down 0.83%, Japan up 1.39% and Hang Sang up 2.70%.

The Dow should open nominally higher as Treasury Secretary nominee Yellen is expected to call for expansive government action to bolster the economy. The 10-year is off 12/32, the dollar is weaker and crude is up about 0.5%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.