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Market Booms in 2023

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Seemingly everywhere investors look, markets appear to be booming in 2023, a stark turnaround from the doldrums of 2022.

Signs of Frothiness

Meme stocks, technology shares, bitcoin — all have risen sharply this year, catching the attention of bears, who see signs of frothiness in many corners of today’s markets.

Views on Bubble

Meanwhile, bulls maintain that this is an exaggeration, and that calling signs of a bubble would be premature.

“These valuations are unsustainable,” says Tavi Costa, portfolio manager at Crescat Capital.

Increased Demand for Call Options

Outside of cash markets, demand for call options, representing bullish bets on the market, has also improved markedly in 2023.

Rally Potential

Even with short-dated Treasury yields offering investors 5% returns with little risk, some market strategists see scope for the rally to continue.

“Early bull markets feel like this,” says Cox.

The Market Landscape

Here’s a look at four corners of the market where frothiness is most evident.

Meme Stocks

GameStop Corp. kicked off the “meme stock” trend when it soared north of $400 a share in January 2021. Many meme stocks are tied to money-losing businesses, but this hasn’t stopped the Roundhill Meme ETF from rising nearly 59% so far this year, according to FactSet data.

Bitcoin Rebound

Impact on Crypto-Linked Stocks

Bitcoin’s gains have also benefited many crypto-linked stocks. For instance, MicroStrategy Inc., which holds more than $4 billion bitcoin, saw its shares up more than 210%. Similarly, Riot Platforms, a crypto miner, has seen its shares rise 440%.

Why Some Crypto Stocks Have Surged Up to 400% This Year, Outperforming Bitcoin

Introduction

Megacap technology stocks like Meta Platforms Inc. and Amazon.com Inc. have been grabbing the headlines lately. However, it’s not just the big players that are experiencing gains. Many smaller technology firms have also been swept up in the wave, leading to impressive returns for Cathie Wood’s flagship fund, the ARK Innovation ETF.

ARK Innovation ETF Performance

According to FactSet data, the ARK Innovation ETF has gained over 50% this year. This impressive performance can be attributed in part to Tesla Inc., which is one of the “Magnificent Seven” group of megacap stocks alongside Meta and Amazon. Tesla’s shares have risen by 111.09% year-to-date, reaching $260.02 per share.

Coinbase Global Inc.’s Impressive Growth

Coinbase Global Inc., the second-largest holding in ARK Innovation ETF, has seen even more substantial gains. So far this year, it has outpaced bitcoin with a remarkable 184.9% increase.

Call Buying Continues

One notable trend this year is the significant increase in the purchase of equity call options by investors. This indicates that traders expect the current rally to continue into 2023.

On July 11th, the CBOE equity put-call ratio hit an 18-month low below 0.50. This ratio compares the demand for put contracts on U.S. stocks and exchange-traded funds, including index-tracking funds like the SPDR S&P 500 ETF, with the demand for call contracts.

As of late last week, the ratio stood at 0.60, aligning with its five-year average. Calls represent bullish bets on the underlying stock or index, while puts indicate a belief in a decline in the underlying asset.

In conclusion, smaller technology firms have been experiencing significant growth alongside megacap stocks like Meta Platforms Inc. and Amazon.com Inc. Cathie Wood’s ARK Innovation ETF has seen impressive gains this year, thanks in part to its top holding, Tesla Inc. Additionally, Coinbase Global Inc. has outpaced bitcoin with its substantial growth. Finally, the increase in equity call options suggests that investors anticipate the current rally to continue into 2023.

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