U.S. stock futures were sharply lower in early trading on Friday as heightened speculative trading by retail investors unnerved the market.
Dow Jones Industrial average futures lost 220 points, or 0.7%. S&P 500 futures lost 0.8%. Nasdaq 100 futures shed 1.1%.
Shares of GameStop doubled in premarket trading after Robinhood said it would allow limited buying of the stock and other heavily shorted names after restricting access the day before. Robinhood raised more than $1 billion from its existing investors overnight, in addition to tapping bank credit lines, to ensure it had the capital required to allow some trading again in the volatile stocks.
Investors are concerned that if GameStop continues to rise in such a volatile fashion, it may ripple through the financial markets, causing losses at brokers like Robinhood and forcing hedge funds who bet against the stock to sell other securities to raise cash. At the same time, there are fears that the GameStop mania is a sign of a larger bubble in the market and that its unraveling could also cause turbulence and hit retail investors hard. Several e-brokers on Thursday took steps to curb the deliberate buying of highly speculative names. A number of lawmakers also called for an investigation into the chaotic trading.
“Between Washington calling for hearings and reports Robinhood was forced to not only draw down on its credit lines but also raise $1B from existing investors, the entire situation continues to erode market confidence,” Adam Crisafulli, founder of Vital Knowledge, said in a note Friday.
It’s been a volatile week on Wall Street. The Dow lost more than 600 points on Wednesday, suffering its worst sell-off in three months. Then the blue-chip benchmark rebounded by 300 points on Thursday amid a broad market rally. All three major averages have lost at least 1% this week.
The market also experienced the highest trading volume in years as the mania heated up. On Wednesday, total market volume hit more than 23.7 billion shares, surpassing the level during the height of the financial crisis in 2008. Thursday also saw extremely heavy trading with more than 19 billion shares changing hands.
A wave of retail traders have been motivating each other on the red-hot WallStreetBets Reddit forum to pile into the most hated names by hedge funds, creating massive short squeezes in the stocks. GameStop has soared more than 900% in January, while AMC Entertainment has rallied over 300% this month.
“That smaller-cap rally would likely be destabilizing and create inefficiencies,” Christopher Harvey, senior equity analyst at Wells Fargo, said in a note. “Stocks are ultimately grounded by fundamentals – and reversions can be very painful to both the upside and the downside.”
Strong corporate earnings continued to roll in after the bell on Thursday. Payments giant Visa, Mondelez, Western Digital and Skyworks Solutions all rose in extended trading after reporting better-than-expected profits and sales for their quarterly results.
Caterpillar, Chevron, Eli Lilly and Honeywell report earnings before the bell on Friday.
On the vaccine front, biotech firm Novavax said Thursday that its coronavirus vaccine was more than 89% effective in protecting against Covid-19 in its phase three clinical trial conducted in the United Kingdom.
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