Robinhood traders may be to blame for the stock market's decidedly crypto feel

U.S. equity markets have been nearly as unpredictable as the crypto markets these days.

Thursday's trading session provided the latest example, with the benchmark Dow Jones Industrial Average and S&P 500 falling 6.9% and 5.8%, respectively. 

The move disrupted an equally surprising rally in stocks that began at the end of March. As our friend Joe Wiesenthal at Bloomberg previously noted, the stock market went through what should have been a 10-year market cycle in under four months, with investors most recently plunging into so-called trash stocks. Indeed, despite the mounting spread of coronavirus and the lockdown of much of the U.S. economy, stocks continued to trade higher — driven in part by glued-to-their-screen retail traders.

Hertz provides what is perhaps the best example of this phenomenon. Robinhood users began snapping up shares of the stock at the beginning of June, and the number of the app's users holding the stock spiked from 60,000 on June 1 to 160,000 on June 10. At the same time, the company's stock price rose more than 570% from June 3 to June 8 — an odd turn of events for a firm that filed for Chapter 11 bankruptcy protection in May and is still sitting on $18 billion worth of debt.

The retail dash, naturally, makes little sense to professional investors like Glenn Reynolds, chief executive of CreditSights, who told investors on Monday that Hertz's price action didn't "make any sense," as the Financial Times reported. 

Elsewhere, Robinhood users poured into Carnival Cruise Line. Again, another trend belied by business fundamentals.

The CEO on Thursday admitted that he doesn't know when exactly the firm will be able to "sail again."

Meanwhile, retail investors also poured into airline stocks and ETFs, including US Global Jets ETF Shares. That's despite several questions hanging over the market, including when flight traffic will return to normal.

JPMorgan earlier this week downgraded JetBlue and United because of value concerns. Analyst Jamie Banker said that the bank doesn't "view increased summer schedules as a harbinger of solid recovery."

Thursday's price action, it turned out, wasn't kind to the aforementioned stocks: Hertz, CCL and JET ended the day down 18%, 15.3% and 12.8%, respectively.

Despite questions around the fundamentals of these various companies, retail investors kept buying ahead of Thursday, driven in part by the availability of free trading across virtually every stockbroker platform and, of course, newfound boredom amid a global pandemic and lockdown. 

Such dynamics are more familiar to traders in the digital asset market, in which retail traders and sentiment drive price swings rather than fundamentals, in many cases. Indeed, equities markets have been reminiscent of the halcyon days of the 2017 initial coin offering boom, when irrelevant news or FUD could drive a token's price to the proverbial moon. 

"Definitely earnings matter much less now," said Su Zhu, co-founder of crypto hedge fund Three Arrows Capital. "All about memetics and narrative."

Jeff Dorman of crypto hedge fund Arca made a similar observation, noting that there are two specific factors at play fueling retail fervor. First, for some individuals, personal spending is down while income has stayed the same. 

"There is no other place to spend and that gives a feeling of more disposable income that has been finding its way into the E*Trades, Robinhoods, and TDAmeritrades."

The other factor is that institutional investors aren't trading as much as folks might think, according to Dorman. 

"Most people have made their bets and are now just waiting," he said.  "Those who were in the depression camp largely already sold into March and April and those who saw a V-shaped recovery coming made their bets in March and April already."

That factor is, perhaps, what's led retail to helm the ship, so to speak. 

This phenomenon isn't new for stocks. We've seen hints of this type of frenzy driving stock prices higher, such as Tesla in February. The fervor, which most observers attributed to retail players, drove the stock over $900 per share from ~$550 in the matter of a few days. 

To be sure, markets are typically driven by a mix of fundamentals and technicals (sentiment, momentum, and liquidity), but these dynamics shift, as noted by Jamie Selway, a market structure expert who previously led Blockchain.com's institutional business. 

"The proportions change," he said. "It definitely has some dimensions of 2000," referring  to the tech-led stock market boom that drove the Nasdaq to historic levels. Prior to today's bloodbath, the Nasdaq crested the historic 10,000 level, picking up more than 40% since bottoming out in March at ~6,800. The 2000 boom was even more impressive, with the Nasdaq picking up more than 50% in the four months leading up to pop of the historic tech bubble. 

"It's really not as different as you think," noted Dave Weisberger, the CEO of CoinRoutes, who added:

"All of these periods end, more or less, in the same couple of ways. Either there is a crash wiping out most of the small players, or the regulator step in and punish those that are leading the effort. Sometimes both."