Quantum-computing, nuclear-power, cryptocurrency, cannabis and heavily-shorted stocks all got hammered on Wednesday, putting the brakes on a recent run-up
Retail traders who had developed a taste for gambling on speculative stocks were facing a day of reckoning on Wednesday as many of their favorite trades suffered a startling meltdown.
The carnage began with a comment from Nvidia Corp. $(NVDA)$ chief executive Jensen Huang at a CES tech conference in Las Vegas about how quantum computers could still be 20 years away. That helped trigger a punishing selloff in shares of quantum-computing stocks like Rigetti Computing Inc. and IonQ Inc. $(IONQ)$
Both of those stocks were soon down as much as 50% on the day, eventually tallying their biggest daily declines on record, FactSet data showed. Other popular quantum names, including Quantum Computing Inc., saw similarly severe declines.
But the pressure soon spread to other stocks popular with the retail crowd as individual speculators rushed to meet margin calls, said Farzin Azarm, a managing director at Mizuho Securities USA.
After helping to magnify gains on the way up, the rampant use of leverage by traders appeared to help exacerbate losses on the way down, as it often does.
In December, Interactive Brokers Group Inc. $(IBKR)$ founder and Chairman Thomas Peterffy said that margin loans on his platform had risen 16% over the previous three months. He made the remark during an appearance at a conference hosted by Goldman Sachs Group $(GS)$.
"The retail crowd is facing a day of reckoning today," Azarm at Mizuho told MarketWatch in an interview. "They had been buying into these extremely speculative names, but now that's starting to unwind."
A FTSE-Russell index of heavily-shorted U.S. stocks, which had otherwise seen its strongest start to a year since the meme-stock madness of 2021, dropped more than 5% on Wednesday, according to LSEG data.
Aerospace and space-exploration stocks were swept up in the selling, with shares of Intuitive Machines Inc. (LUNR) down more than 5% and Archer Aviation $(ACHR)$ down nearly 6%.
Nuclear-power stocks also suffered. NANO Nuclear Energy Inc. $(NNE)$ fell more than 11%, while NuScale Power Corp. $(SMR.AU)$ was down more than 9%. Other themes popular with retail traders, from cryptocurrency, to cannabis to autonomous driving, also took a hit.
And, of course, penny stocks like XTI Aerospace Inc. $(XTIA)$ got hammered. Shares were trading at just 5 cents a pop, off more than 50% on the day, after surging 30% one day earlier.
Retail traders have been particularly active in the market lately, Mizuho's Azarm said, which suggests that they were responsible for much of the action in these more speculative names.
Trading volume in the U.S. equity market exploded earlier this week. Nasdaq Composite trading volume rose to nearly 14 billion shares on Tuesday, the highest level on record going back to 1995, according to Dow Jones Market Data. The market wasn't as active on Wednesday.
According to data tracked by Azarm, roughly 55% of activity in the U.S. market over the past two weeks has been tied to platforms typically used by individual investors.
"This is massive. Even during the 2021 meltup, we hardly saw anything this elevated," he said, referring to the meme-stock frenzy that saw shares of GameStop Corp. $(GME)$ and AMC Entertainment Holdings $(AMC)$ soar in early 2021.
Some of the recent surge in trading volume across the U.S. market appeared to be tied to penny stocks, Joe Saluzzi, partner and co-founder of Themis Trading, told MarketWatch. Volume in shares of companies trading at $1 or less has been unusually high lately, he said.
Quantum-computing stocks, heavily-shorted names, and other popular speculative bets have soared since the election as President-elect Donald Trump's victory appeared to unleash "animal spirits" in the equity market, said Julian Klymochko, CEO and chief investment officer at Accelerate, an alternative-investment firm that offers several exchange-traded funds.
Recent froth in markets hasn't been limited to stocks. It also has been evident in the cryptocurrency market, with the price of a bitcoin rising north of $100,000, while the market capitalization of Fartcoin, a popular meme token, recently surpassed $1 billion, making it worth more than some publicly traded companies.
Shares of heavily-shorted companies like Him & Hers Inc. $(HIMS)$, SEALSQ Corp. (LAES), and Enovix Corp. $(ENVX)$ soared late last year. But they ran into trouble this week.
"There has been a massive speculative bid in the market that is keeping these heavily-shorted stocks elevated. In the business, we call them profitless junk stocks," Klymochko at Accelerate said.
The selloff in these speculative names has coincided with weakness in the broader market. The S&P 500 index, Nasdaq Composite Index and Dow Jones Industrial Average have fallen this week as the yield on the 10-year Treasury note BX:TMUBMUSD10Y approached its highest level since late 2023, according to FactSet data.
For retail traders who bought into these more speculative names, rising yields appeared to be less of a concern, said Steve Sosnick, chief strategist at Interactive Brokers, a platform popular with retail traders.
"Rising rates may have changed the overall market's calculus of risk vs. reward, which may temper speculation, but they weren't a consideration in their valuation and performance prior to today," Sosnick told MarketWatch via email.
"Frankly, I think that those who went heavily into speculative quantum stocks are getting clobbered, which is now spilling into other speculative names."
To be sure, plenty of froth remained in the market as of Wednesday afternoon. According to Klymochko, MicroStrategy Inc. $(MSTR.AU)$ has become, in his view, the posterchild for the market's speculative excesses. The software company has transformed itself into a vehicle for buying bitcoin, and its shares soared in the wake of Trump's electoral victory as bitcoin prices climbed to a record high.
Shares of the company have pulled back from their November peak. But MicroStrategy has continued to trade at a sizable premium to its net asset value, which mostly consists of the value of its bitcoin holdings.
The S&P 500 SPX had shrugged off earlier losses to finish higher on Wednesday, as did the Dow Jones Industrial Average DJIA. The Nasdaq Composite COMP was down 0.1% at 19,478.88.
The U.S. stock market will be closed on Thursday as the U.S. observes a national day of mourning for former President Jimmy Carter, who died in late December.
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