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Low-Quality Momentum Stocks Soar: Are Markets Too Frothy?
Stocks Mixed: Tariffs, Earnings Season, Powell’s Future Dominate the Headlines
Stocks are mixed thus far this week amid a flurry of trade policy headlines, the start of earnings season, and rumors about Fed Chair Jerome Powell’s future. Last night, President Donald Trump announced that a deal had been signed with Japan. Japan will invest $550 billion in the US (of which the US will receive 90% of the profits). Additionally, the US will levy a 15% tariff on Japanese goods. President Trump’s August 2nd trade deadline is approaching quickly for the countries that have not yet signed deals with the United States.
That said, Treasury Secretary Scott Bessent has promised that there are several trade deals likely to be signed in the current days, and for larger deals like the EU, the August deadline is flexible, reiterating that the US would rather wait longer for better deals than rush them. Meanwhile, stocks flushed lower midday Tuesday after a fake rumor surfaced that embroiled Fed Chair Jerome Powell had been fired.
Powell has been facing an onslaught of criticism amid his ‘hawkish’ monetary policy. However, many rate-sensitive areas have rallied over the past few days, including housing stocks and small caps, signaling that rate cuts may be on the horizon.
Are Momentum Stocks Signaling Short-term Market Froth?
While the price action of the major indices remains bearish, momentum stocks signal that it may be time for Wall Street investors to take their foot off the gas pedal. Below are four reasons:
· Signs of frothiness appear amid rallies in heavily shorted “retail stocks”: One sign of an overheated market that I have witnessed over the years is when “junk off the bottom” starts to rally. That is, cheap, beaten-down, heavily shorted, unprofitable stocks begin to rally. For instance, OpenDoor Technologies ripped as much as 500% this month. Meanwhile, similar, heavily-shorted and beaten-down stocks like Krispy Kreme, Beyond,Kohls and Beyond Meat are experiencing relief rallies.
· Options speculation frothiness: Additionally, “0DTE” (zero days until expiration) options now account for around two-thirds of all daily options volumes. Such froth suggests that retail investors may have a case of “irrational exuberance” in the short-term.
· Gravity: The S&P 500 Index has trended above its 20-day moving average for roughly two months. Historically, gravity takes hold at this juncture, and stocks are due for some profit-taking.
· Back half of July seasonality: Since 1950, the S&P 500 Index has been strong in the first half of July before paring gains in the back half of the month.
Markets Can Stay Irrational
As the old Wall Street adage goes, “Markets can stay irrational longer than you can stay solvent.” The clues above do not mean to sell everything or to go short, but instead be aware that the music can stop at any moment, and risk management is warranted.
Bottom Line
Signs of ‘irrational exuberance’ are emerging in US stock markets as low-quality momentum stocks squeeze shorts and rampant short-term options trading proliferates.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: OpenDoor Technologies, Krispy Kreme, Beyond, Kohls and Beyond Meat
For Immediate Release
Chicago, IL – July 24, 2025 – Today, Zacks Investment Ideas feature highlights OpenDoor Technologies (OPEN - Free Report) , Krispy Kreme (DNUT - Free Report) , Beyond (BYON - Free Report) , Kohls (KSS - Free Report) and Beyond Meat (BYND - Free Report) .
Low-Quality Momentum Stocks Soar: Are Markets Too Frothy?
Stocks Mixed: Tariffs, Earnings Season, Powell’s Future Dominate the Headlines
Stocks are mixed thus far this week amid a flurry of trade policy headlines, the start of earnings season, and rumors about Fed Chair Jerome Powell’s future. Last night, President Donald Trump announced that a deal had been signed with Japan. Japan will invest $550 billion in the US (of which the US will receive 90% of the profits). Additionally, the US will levy a 15% tariff on Japanese goods. President Trump’s August 2nd trade deadline is approaching quickly for the countries that have not yet signed deals with the United States.
That said, Treasury Secretary Scott Bessent has promised that there are several trade deals likely to be signed in the current days, and for larger deals like the EU, the August deadline is flexible, reiterating that the US would rather wait longer for better deals than rush them. Meanwhile, stocks flushed lower midday Tuesday after a fake rumor surfaced that embroiled Fed Chair Jerome Powell had been fired.
Powell has been facing an onslaught of criticism amid his ‘hawkish’ monetary policy. However, many rate-sensitive areas have rallied over the past few days, including housing stocks and small caps, signaling that rate cuts may be on the horizon.
Are Momentum Stocks Signaling Short-term Market Froth?
While the price action of the major indices remains bearish, momentum stocks signal that it may be time for Wall Street investors to take their foot off the gas pedal. Below are four reasons:
· Signs of frothiness appear amid rallies in heavily shorted “retail stocks”: One sign of an overheated market that I have witnessed over the years is when “junk off the bottom” starts to rally. That is, cheap, beaten-down, heavily shorted, unprofitable stocks begin to rally. For instance, OpenDoor Technologies ripped as much as 500% this month. Meanwhile, similar, heavily-shorted and beaten-down stocks like Krispy Kreme, Beyond,Kohls and Beyond Meat are experiencing relief rallies.
· Options speculation frothiness: Additionally, “0DTE” (zero days until expiration) options now account for around two-thirds of all daily options volumes. Such froth suggests that retail investors may have a case of “irrational exuberance” in the short-term.
· Gravity: The S&P 500 Index has trended above its 20-day moving average for roughly two months. Historically, gravity takes hold at this juncture, and stocks are due for some profit-taking.
· Back half of July seasonality: Since 1950, the S&P 500 Index has been strong in the first half of July before paring gains in the back half of the month.
Markets Can Stay Irrational
As the old Wall Street adage goes, “Markets can stay irrational longer than you can stay solvent.” The clues above do not mean to sell everything or to go short, but instead be aware that the music can stop at any moment, and risk management is warranted.
Bottom Line
Signs of ‘irrational exuberance’ are emerging in US stock markets as low-quality momentum stocks squeeze shorts and rampant short-term options trading proliferates.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.7% average gain per year. Amazingly, they soared with average gains of +48.4%, +50.2% and +56.7% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.