Traders Face a 'Day of Reckoning' as Wall Street's Riskiest Stocks Tumble

Retail investors with a penchant for speculative stocks faced a harsh reality on Wednesday, as several of their favored trades experienced significant declines. This downturn was sparked by comments from Nvidia CEO Jensen Huang during a CES tech conference in Las Vegas, where he stated that quantum computers might still be two decades away.

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His remarks triggered a sharp selloff in quantum-computing stocks, including Rigetti Computing and IonQ, both of which plunged nearly 50% during the day, marking their steepest one-day declines on record, according to data. Other quantum-related names, such as Quantum Computing Inc., also suffered substantial losses, falling more than 40%.

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The turmoil wasn’t confined to quantum-computing stocks. Speculative names across various sectors began to slide as retail traders scrambled to cover margin calls. Farzin Azarm, managing director at Mizuho Securities USA, noted that the heavy use of leverage by individual investors, which had amplified gains in prior weeks, now exacerbated losses as positions were liquidated.

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Interactive Brokers Chairman Thomas Peterffy recently highlighted that margin loans on his platform had risen 16% over three months, signaling a surge in leveraged bets among retail traders. Azarm described Wednesday as a “day of reckoning” for these investors, who had poured money into highly speculative stocks, only to see those positions unravel.

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An index tracking heavily shorted U.S. stocks, which had been on a strong run since the start of the year, tumbled more than 5% on Wednesday, according to LSEG data. Stocks in aerospace, space exploration, nuclear power, cryptocurrency, cannabis, and autonomous driving, all popular themes among retail traders, were caught in the selling frenzy. For instance, Intuitive Machines fell over 5%, while penny stock XTI Aerospace plummeted more than 50%, trading at just 5 cents after a 30% gain the day before.

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Retail traders have been particularly active in the market recently, with platforms commonly used by individual investors accounting for 55% of market activity over the past two weeks, according to Azarm. Trading volumes in the U.S. equity market surged earlier this week, with Nasdaq trading volume reaching a record 14 billion shares on Tuesday, though activity slowed slightly on Wednesday.

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The speculative fervor extended beyond equities, as cryptocurrencies also reflected froth. Bitcoin surpassed $100,000, while Fartcoin, a meme token, achieved a market capitalization of over $1 billion, exceeding the value of some public companies. However, heavily shorted stocks such as Him & Hers, SEALSQ, and Enovix, which had previously rallied, faced setbacks this week.

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Julian Klymochko, CEO of alternative investment firm Accelerate, noted that speculative bets had been propping up many heavily shorted stocks, dubbing them “profitless junk stocks.” Rising interest rates, which typically temper risk-taking, had coincided with this week’s selloff, as the yield on the 10-year Treasury note approached its highest levels since late 2023. Yet, retail investors appeared less concerned about macroeconomic factors, focusing instead on the immediate performance of their speculative trades.

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Steve Sosnick, chief strategist at Interactive Brokers, explained that rising rates might have influenced the broader market’s risk-reward calculus but hadn’t been a significant factor in the valuation of speculative stocks. Instead, the collapse in quantum-computing shares spilled over into other speculative areas, exacerbating the downturn.

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Despite the widespread losses, some speculative excesses remained. MicroStrategy, which has pivoted to serve as a proxy for bitcoin ownership, was cited by Klymochko as a symbol of market froth. The company’s stock had soared in tandem with bitcoin’s rally but continued to trade at a premium to its underlying asset value.

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Amid the selloff, the broader market showed resilience. The S&P 500 recovered earlier losses to close higher, rising 0.16%, while the Dow Jones Industrial Average gained 0.25%. The Nasdaq Composite, however, ended the day slightly lower, down 0.1% at 19,478.88.

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The U.S. stock market will remain closed on Thursday as the nation observes a day of mourning for former President Jimmy Carter, who passed away in late December. The pause offers a moment for retail traders and investors to reflect on recent market volatility and recalibrate their strategies in a landscape where speculative enthusiasm faces growing challenges.

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