It's Hard to Kill Day Trader Spirits at Market's Riskiest Edges

A five-day climb in Treasury yields has tempered the post-election enthusiasm that fueled gains in major U.S. stocks. However, speculative corners of the market, like Bitcoin and its meme-driven counterparts, remain hotspots of frenzied activity, defying broader market caution.

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Bitcoin surged back above $100,000, bolstered by speculative fervor, while Michael Saylor’s MicroStrategy Inc. crossed $400 per share. Even a cryptocurrency called “fartcoin” experienced a meteoric rise, with its market capitalization swelling beyond $700 million. This rally coincided with Donald Trump’s visit to the New York Stock Exchange, where he pledged to “do something great with crypto” if elected president, further fueling the speculative mania.

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These dramatic gains highlight the resilience of day traders, even as major U.S. equity benchmarks recorded muted movements, with some of the smallest weekly changes since Trump’s reelection. A sharp 24-basis-point jump in U.S. 10-year Treasury yields, the largest this year, failed to deter speculative investors. Instead, they poured money into leveraged exchange-traded funds (ETFs) and assets linked to Elon Musk, keeping the market frenzy alive.

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“It’s just boredom and excess liquidity,” explained Vincent Deluard, director of global macro at StoneX. With the election excitement subsiding, “it’s more fun to inflate a bubble in meme coins, epitomized by fartcoin, whose market cap now surpasses that of 50% of U.S.-listed companies.”

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While meme traders thrived, more traditional investments faced headwinds. A Morgan Stanley long-short basket tracking momentum stocks dropped nearly 3.5% for the week, marking its third-worst performance this year. Similarly, the Russell 2000 index and a gauge of unprofitable tech firms each fell close to 3%. The S&P 500 ended a three-week winning streak with a 0.6% decline, as less than half of its components remained above their 50-day moving averages. Meanwhile, the largest ETF tracking long-dated Treasuries endured its worst week of 2024, losing over 4%.

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Outside the conventional market, speculative trading persisted unabated. Bitcoin, which briefly dipped below $95,000 on Tuesday, quickly recovered, securing its sixth consecutive weekly gain. Alongside Bitcoin, a variety of meme tokens also rallied, underscoring the speculative fervor dominating fringe markets.

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Retail investors continue to wield significant influence, as evidenced by the rising volume of trades conducted on off-exchange venues like those operated by equity wholesalers serving platforms such as Robinhood. Recently, this trading activity has consistently exceeded 50%, even reaching record levels.

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Assets associated with Elon Musk saw notable gains. Tesla Inc. added another 12% this week, increasing its market cap by over $500 billion since the election. Destiny Tech100 Inc., a closed-end fund partially tied to Musk’s SpaceX, soared more than 500% post-election, pushing its market value to over ten times its stated net assets.

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“The markets still have their animal spirits, but it’s getting more selective,” observed Marvin Loh, senior macro strategist at State Street Global Markets. “Without an additional catalyst, the more esoteric names are more vulnerable.”

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Signs of an overstretched market are emerging. A risk-on positioning and sentiment index maintained by Goldman Sachs recently hit its highest level since 2018, with over half its indicators showing elevated readings. Historically, such conditions have preceded market pullbacks.

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“Our aggregate positioning and sentiment indicator has reached the 70th percentile, despite only marginal improvements in macroeconomic data,” noted Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs. “Historically, similarly elevated positioning has signaled a speed limit for equity returns.”

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Investors remained cautious ahead of the Federal Reserve’s policy meeting next week, where officials are expected to approve a quarter-point rate cut. However, not all analysts agree. Deutsche Bank and BNP Paribas have forecast no further Fed action this year, and monetary easing is projected to slow in 2025, with economists anticipating just three rate reductions.

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Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, expressed skepticism about the market’s ability to sustain its speculative momentum. While a December rate cut could bolster risk-taking, Suzuki noted that it might not serve as a significant near-term catalyst.

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“Unless Powell adopts a very dovish tone, I wouldn’t expect the cut to spark much of a rally,” Suzuki said. “However, it does provide some downside support for markets.”

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This mix of speculative zeal and cautious optimism paints a complex picture of market dynamics, with traditional sectors showing restraint while the speculative edge thrives, driven by retail investors and meme-fueled enthusiasm.

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