Signs of bubble emerge post election, Barclays warns

Investing.com -- Barclays analysts have cautioned that signs of a market bubble are appearing in the wake of the U.S. presidential election, driven by retail investor exuberance and increased speculative activity.

According to Barclays (LON:BARC ), the post-election crypto surge has extended to other parts of the equity market.

The firm highlighted that "euphoria in the crypto market has spilled over to other sectors of the equity markets that are generally perceived to be darlings of the retail investors community."

This trend is said to include retail favorites such as Nvidia (NASDAQ:NVDA ), Tesla (NASDAQ:TSLA ), and MicroStrategy (MSTR), which have seen increased use of leveraged exchange-traded products (ETPs), amplifying rebalancing flows over the past month.

Barclays also flagged a surge in options trading. "Option volume on US stocks recently increased by 50% to $459 billion in the first week post-elections," noted the analysts.

While this volume has since moderated, they note it remains 20% above election-day levels.

Additionally, the bank pointed to inverted skew in options pricing on "unprofitable" stocks as a potential sign of froth. Inverted skew signals strong demand for upside exposure—a hallmark of speculative bullishness, according to Barclays.

The analysts underscored the risk of this speculative fervor spilling over to broader markets, particularly against the backdrop of geopolitical risks, such as escalating tensions in the Russia-Ukraine conflict.

Barclays says those interested in hedging strategies should assess VIX call spreads and European equity put options tied to rising oil prices, as potential safeguards.

While market exuberance often accompanies election cycles, Barclays urged caution, warning that the rapid rise in speculative activity in retail-dominated segments could lead to increased volatility in the coming months.

Source: Investing.com