Investors have been rushing into the riskiest corners of the US stock market, giving last year’s laggards a significant boost. This trend is evident in the gains recorded by shares of unprofitable technology companies, distressed corporations, and firms with high short interest.
Most-Shorted Stocks Outperform S&P 500 Index
The Goldman Sachs Group Inc.’s index of non-profitable technology stocks closed up 3.3%, while a Goldman gauge for most-shorted stocks rose as much as 1.8% but closed little changed. Last year, both Goldman indexes – especially the gauge tracking unprofitable tech firms – lagged behind the benchmark.
Market Strategist Weighs in on Risk-On Trade
"This is aggressive risk-on trading," said Michael O’Rourke, chief market strategist at Jonestrading. "I see this as a short-term beginning of the year phenomenon that likely runs out of momentum by the end of the week."
Small-Cap Stocks Lag Behind S&P 500
The bigger appetite for risk, however, did not give as much of a boost to small-cap stocks on Monday, with the Russell 2000 Index lagging behind the S&P 500. The small-cap index fell 0.1%, while the S&P 500 rose 0.6%.
Uncertainties Loom Large Despite Risk-On Trade
The risk-on trade comes at a time when uncertainties are looming large everywhere. There is the possibility that US President-elect Donald Trump will unleash a new wave of tariffs and spark off a trade war with key allies when he takes office later this month. The Federal Reserve’s interest-rate path also remains unclear as inflation has stayed stickier than expected. Meanwhile, worries about the high valuations in technology stocks have started to grow.
Positive News Drives Technology Stocks Higher
Despite those concerns, a slew of positive news on Monday pushed technology stocks higher. First, Nvidia Corp.’s server assembly partner Hon Hai Precision Industry Co. – also known as Foxconn – reported faster-than-expected revenue growth on continuing demand for artificial intelligence infrastructure.
Nvidia’s Partner Reports Strong Revenue Growth
Hon Hai Precision Industry Co., the server assembly partner of Nvidia Corp., reported revenue growth that exceeded expectations, driven by continued demand for artificial intelligence infrastructure. This news is likely to have a positive impact on Nvidia’s shares, as investors expect the company’s Chief Executive Officer Jensen Huang to make significant announcements in the coming days.
Qualcomm Introduces New Chips
Qualcomm Inc. introduced new chips designed to power personal computers capable of running the latest artificial intelligence software yet cost as little as $600. These new chips are likely to be a major boost for Qualcomm’s shares, as they have the potential to revolutionize the way people use artificial intelligence in their daily lives.
Investors Expect Squeeze on Short Sellers
Investors also expect a speech from Nvidia Chief Executive Officer Jensen Huang to move the chipmaker’s shares. "It feels like the Foxconn news, coupled with anticipated announcements from the Consumer Electronic Show, are sparking a bid across the board in technology, causing a lot of short squeezes," said Dave Lutz, equity sales trader and macro strategist at Jonestrading.
What is a Short Squeeze?
A short squeeze occurs when traders who bet against a stock are forced to buy shares back to cover losing positions. Such covering drives share prices even higher, creating a self-reinforcing cycle that can drive stock prices to unsustainable levels.
Market Volatility Ahead?
The risk-on trade and the subsequent gains in technology stocks may be a short-term phenomenon, but it remains to be seen whether this trend will continue or if the market will experience a significant correction. The uncertainties surrounding US President-elect Donald Trump’s policies and the Federal Reserve’s interest-rate path are likely to continue weighing on investors’ minds.
Conclusion
Investors have been rushing into the riskiest corners of the US stock market, giving last year’s laggards a significant boost. While this trend may be short-term, it remains to be seen whether the market will experience a correction or if the gains in technology stocks will continue. One thing is certain – the uncertainty surrounding the market’s direction is likely to continue weighing on investors’ minds.
Additional Reading
- The US’s Worst Fears of Chinese Hacking Are on Display in Guam: Bloomberg Businessweek explores the growing concerns about China’s hacking activities and their impact on global trade.
- Elon Musk Is Not Having a Happy New Year: Bloomberg Businessweek takes a look at Elon Musk’s struggles with his companies, including Tesla and SpaceX.
- Why Everyone’s Obsessed With Meat Sticks and Cottage Cheese: Bloomberg Businessweek examines the growing trend of health-conscious eating and its impact on consumer behavior.
- Zyn’s Online Hype Risks Leading to the Nicotine Pouches’ Downfall: Bloomberg Businessweek investigates the potential risks associated with the rapid growth of Zyn’s nicotine pouches.
Disclaimer
The information provided in this article is for general informational purposes only and should not be considered as investment advice. Readers are advised to consult with a financial advisor before making any investment decisions.
References
- Goldman Sachs Group Inc.: A leading investment bank and financial services company.
- S&P 500 Index: A widely followed stock market index that represents the performance of the top 500 publicly traded companies in the US.
- Russell 2000 Index: A stock market index that tracks the performance of small-cap stocks in the US.
