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SPACulation Part 2

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SPACs are running rampant in the market today, with over 250 "blank check IPOs" generating $79 billion in value in the past 52-weeks. According to a CNBC interview with Jim Chanos, founder of the Kynikos Associates, around $2 billion in value is being created daily by these IPO shell corporations (as of mid-January), which equates to $500 - $600 billion annually.

These investment groups are racing to get their respective SPACs on the market before the market euphoria deflates. I would be cautious with SPACS as shady dealing can occur. Without the proper institutions underwriting and valuing these businesses, they are prone to overvaluation, as they can market their pre-IPO shares to retail investors and tell their story to the public, which is something that traditional IPOs cannot do.

You can see the SPAC risk best exemplified with the rise and fall of NIkola (NKLA - Free Report) shares, as potential fraud comes to the forefront of that narrative. 

This market euphoria may just be heating up with over 40% of the total capital raised in 2020 IPOs coming from Q4. The equity market is trading at crazy high valuations, and risk appetites remain ravenous, especially with retail investors.

The ease of market entry with a slew of online trading platforms that offer commission-free trading drove a new generation of investors and traders. With the market going effectively parabolic, everyone and their cousin is a "day trader." This cohort of "traders" has only seen skyrocketing stock prices and are not prepared for any sort of market correction with their out-of-the-money call options, all aimed at more market euphoria.

Average trading volumes have surged in the past few years, with retail traders being a big part of this. According to CNBC, daily trading volumes have more than doubled since 2019, with an average of 14.7 billion shares being traded daily in 2021, compared to the 7 billion average daily share volume in 2019. Risk-seeking retail investors are driving daily volume growth.

I believe that these retail investors have created a lot of froth in the market with SPACulation and the overall aggressive investing approach they are taking. I think we're on the verge of a pullback and am protecting my portfolio with the Nasdaq 100 tracking ETF QQQ (QQQ - Free Report) and S&P 500 tracking ETF SPY (SPY - Free Report) put options with expirations ranging from February to June.

This is to protect my sizable 2020 gains, which I'm sure many have you have tasted, against an impending correction in the markets.

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