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The Next-Generation Of Investing: Robinhood, Bitcoin, r/wallsteetbets, & Cathie Wood

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The economic lockdowns & ripe opportunities in the stock market combined with commission-free trading led to the rise of the retail investor/trader/speculator, or whatever you would like to call this new cohort of market participants. This eager collection of money-hungry professionals has been characterized by their insatiable risk appetite, market-moving social media influence (aka r/wallstreetbets), a penchant for innovative disruptors, and represents the next-generation market controlling investors.

This wave of new investors now makes up over 20% of daily stock market volumes. Their affinity for highly volatile options and cryptocurrencies has created trading environments where fundamentals are being temporarily thrown out the window. There has been a paradigm shift in the market, and 'Robinhood (HOOD - Free Report) investors' are ushering it in.

Many are concerned that these freshman traders will go belly up with their high-risk exposures and lose interest in the markets, but youthful interest in stocks has yet to decelerate. Robinhood, the preferred trading platform of Millennials & Gen Zs, continues to illustrate unbelievable volume & user growth quarter after quarter, as a swelling number of eager young professionals engage in the financial backbone of the economy.

Why Bitcoin?

According to a recent CNBC survey, investors who entered the market since the pandemic began are twice as likely to own digital currencies than individuals in the markets before the pandemic crash.

Of this new cohort of market participants, 32% own individual stocks, and 26% hold digital currency, leaving low-risk options to the "boomers." Lower yielding bonds and ETFs are of no interest to this new cohort of investors looking for better long & short-term returns than what their parents had been able to attain. The 60/40 investment strategy (60% in equities & 40% fixed income portfolio allocation) has become an antiquated model in this era of risk-on investing.

The spreading enthusiasm and the resulting biased towards the crypto market epitomizes this evolving market. Bitcoin and other cryptocurrencies' value are motivated purely by demand, with no fundamentals or physical assets backing their worth. It is a baseless digital asset yet grows in legitimacy with every percentage point higher (counterintuitive to any stock model). In other words, rising cryptocurrency price reflects the increase in institutional interest and eventual adaptation of blockchain-backed assets.  

This asset class's rapid technically-driven swings make it a beautiful trading tool, exemplifying the type of alpha-chasing strategies contemporary traders utilize. Cryptocurrencies are powered by a self-fulfilling prophecy made true by biased investors & traders who come to the same broadly based conclusions that drive this market's daily action.

In fact, the only understandable reason that technical trading levels hold at all is because the market (including algorithmic HFTs) fulfills the consensus prophecy that these predetermine price levels are consequential. These levels have become perceivably more helpful in recent years as a growing number of high-frequency trading algos use them, pushing opportunistic retail traders to follow suit. When you are voting with your wealth, it's prudent to follow the big money.

Innovation-Focused Investing

Yields have been trending down for decades while annual stock returns have grown with accelerating technological advancements. The market is adapting to the new normal, and the inexperienced crowd of new market participants are inspiring a lot of its changes.

Cathie Wood and her fruitful aggressive-growth investing strategy have brought her Ark fund to the forefront of market conversion in the past year. The flagship Ark Innovation ETF (ARKK) and its 4th Industrial Revolution-focused holdings (encompassing technology like AI, cloud-computing, IoT, automation, driverless EV, etc.) has become the benchmark for category-disrupting innovators. ARKK's unbelievable triple-digit pandemic returns have made her an investing icon, earning her the title "Mama Cathie" on Reddit's r/wallstreetbets (WSB), where over 10 million young traders share potentially market-moving ideas.

ARKK's unbelievable triple-digit pandemic returns have made her an investing icon, earning her the title "Mama Cathie" on Reddit's r/wallstreetbets (WSB), where over 10 million young traders share potentially market-moving ideas.

What was once regarded as the 'Warren Buffett Effect' has now turned into the 'Cathie Wood Effect' as innovation-oriented young investors become Cathie disciples. 

The 'Cathie Wood Effect' is characterized by the tidal wave of young traders & investors racing into the recently democratized stock market. A very different crowd than the value investors who followed Warren Buffett into his trades over the past decades. Nevertheless, these young Ark-following traders are debatably more market-moving than their investing predecessors. This freshman cohort is infinitely more united on social media and utilizes significantly more leveraged option contracts (due to the broader availability and easier accessibility of these financial derivatives), which exaggerates both up and downside price movements. 

Does Anyone Still Care About Fundamentals?

New investors aren't as worried about basic market fundamentals as their predecessors. With average long-term interest rates expected to continue trending down and growth-powered tech companies entering the market rapidly, discounted cash flow models are growing increasingly dubious. The fundamental values that stock models provide investors are now more a product of assumptions & bias than reliable near-term earnings. Due to the low-interest-rate environment, analysts are being forced to forecast what kind of cash flows a growing tech company will produce 5 to 10 years out, which is nearly impossible to accurately estimate (the further into the future you go, the closer to guessing it becomes). Nonetheless, fundamentals will become progressively more meaningful once the Fed starts paring its balance sheet and subsequently initiates liftoff (first Fed Funds rate hike).

The pandemic has turned our increasingly precarious market into one giant self-fulfilling prophecy that we are all a product of. If everyone in the market suddenly believes a stock should be trading at a price 20% higher than it is today, you better believe that this stock is going to move up 20% pretty swiftly. We've seen this strategy pan out in WSB's favorite plays like GameStop (GME - Free Report) , and AMC (AMC - Free Report) , which have both turned into gambling tools with random spikes occurring whenever index-level boredom kicks in.

Suppose the people on this investment forum believed a stock should be trading higher. In that case, if even a small portion of WBS's more than 10 million participants can come together on one trading idea and they can make it move, particularly with stocks that have a market cap below $10 billion. Now even institutional investors are following these momentum trades. Social media is beginning to play a formative role in this evolving market.

Valuation multiples are all but thrown out the window when a company has proven growth of 50%+ annually with no deceleration in sight. Unless, of course, these multiples are unjustifiably low on an under-the-radar equity, such as Alight (ALIT - Free Report) and its lead human capital management cloud trading at a significant discount to competitors, could point to a rare opportunity. What matters in this new stock market environment is how much market demand is willing to pay for these unique growth narratives.

The stock market is currently being driven more by sentiment than fundamentals, something that the famous economist John Maynard Keynes coined as 'Animal Spirits' 85 years ago. Behavior finance and an ability to feel the stock market's pulse has never been more important than it is today for market participants.

Final Thoughts

Fundamentals are still the backbone of this financial system in the long run, but the attitude of the market plays a vital role in short-term price action. Relative valuations are still important to institutional investors & traders. You can see the evidence of this in the back and forth rotation that shows money managers chasing weakness and selling relative strength (the seesaw trading between growth and value sectors we've experienced this year).

The next generation of market participants are flooding into digital brokerage apps with market-changing ambitions. Public equities will never trade as they did prior to the pandemic, so it is essential to understand the changes in order to adapt.

Technical levels such as Fibonacci-retracement (extension), relative strength index (RSI), Bollinger Bands, and many other oscillators and trend channels are the foundation of daily trading activity. There is opportunity in momentum as long as you don't overstay your welcome in a parabolic position (a high-risk strategy employed by WSB). Market sentiment towards a particular stock or sector is becoming increasingly important as fundamentals drift to a more secondary concern.

Be careful trading out there as we enter a seasonally slow period for stocks (mid-August to mid-October). Keep your eyes and ears peeled on Jerome Powell and the Fed as any announcement from Central Bank regarding the tapering timeline will likely be the next market catalyst. 

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