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Bubble, Bubble, Toil And Trouble

Jun. 04, 2020 12:30 PM ETBYND, TOON, TLRY, INVVY, INDV, TSLA, TLRY:CA97 Comments
Jaberwock Research profile picture
Jaberwock Research


  • Recently, there has been a huge influx of new retail investors using platforms such as Robinhood.
  • This is at least partly responsible for the disconnect between share prices and their underlying value based on the economy.
  • But, there is one tool on the Robinhood platform that I believe is particularly bad for driving the creation of bubbles in the price of some stocks.
  • Investors chase popular stocks as the bubble inflates but often end up holding the bag when it bursts.

There is a huge disconnect between stock prices and the economy right now as almost all of the market losses from the COVID-19 scare have been recovered, but we still have massive unemployment, a huge drop in GDP, and a downturn in the economy that is going to last well into next year.

One of the drivers of the recovery in stock prices has been a huge influx of retail investors, similar to what happened in the lead-up to the tech bubble in 2000. I think the whole market is overpriced and in bubble territory right now, but, in this article, I am going to focus on one particular aspect of the Robinhood trading platform that I believe is causing price bubbles in individual stocks, especially stocks with a limited public float.

The influx of new retail investors

Since the markets hit their lows as a result of the COVID-19 scare last February, the number of new retail investors using platforms such as Robinhood that provide the opportunity to easily trade small lots with no commissions increased. In a two-month period, the number of Robinhood stock positions has doubled (see chart below). The graph cuts off on May 2nd, the numbers are probably much higher now.

E-trade and Charles Schwab have also seen large increases in the number of trading accounts, with Schwab seeing a 98% year over year increase in the number of trades in the first quarter and the number of active accounts at Interactive Brokers increasing by 28% year over year, as of April.

Robintrack and "herd" investing

Robinhood has introduced an investment tool that allows users to see the total number of investors that have positions in any stock at any time. The Robintrack site provides investors with a list of stocks arranged by popularity (i.e. the number

This article was written by

Jaberwock Research profile picture
I am a retired engineer and company manager. I do not have a financial background or offer financial advice.The articles I write are for interest only and I try to find subjects that interest both me and my readers.I usually take a small position in the companies that a write about, long or short, but most of my investments are in boring blue-chip dividend stocks.An engineering education has provided me with keen analysis skills. Working on projects in over 30 different countries and living on three different continents has given me a broad view of the world and a healthy skepticism about much of what I see in the financial media these days.

Analyst’s Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am short TSLA using long term puts, I also trade in TSLA both long and short using an option strategy, but only small amounts for amusement more than investment.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (97)

EnerTuition profile picture
Hi jaberwock,
When I saw the RObinhood popularity lists, I suspected something like this could happen but did not bother investigating further. Thanks for taking the time to put this together.
Andreas Hopf profile picture
This is good.
I have a question, do the larger firms use computer programs to pick stocks to buy and sell "I have heard it, don't know if it's true" ? And if they do, wouldn't they also notice trade volume and determine if stock is bullish or bearish and trade it ?
It's probably like Bloomberg Terminal but with far less features.
Yes, many firms do computer trading and according to many (together with herd investing) causing todays disconnect between economy and market
Citizens trying to make some money that they can't earn while toiling away at a 9-5 job and the country sees Wall Street as EZ street, Day Trading is becoming a thing but don't the brokerage houses also use computers to jump in and get out quick?
Goomba69 profile picture
Terrific insights on a new angle for momentum trading. A good resource for identifying short opportunities.
Windsun33 profile picture
I looked at a couple of the stocks being hyped, and most seem to be really small with not enough float to even short it. Being small = easy to manipulate.
Goomba69 profile picture
Yeah I would mostly ignore the obvious manipulated stocks, but in some linked to Robinhood there are some weird options prices that also offer some interesting opportunities.
@jaberwock very good article. It'd be cool and informative for you to do one of these a month or so? Just to get a read of any changes and how retail investors are behaving. Thanks for the info.
Jstic profile picture
Retail investors make up about 10% of market trades. Any increase in trading at Robinhood will have minimal effect.
Jaberwock Research profile picture
Studies have put the price elasticity of stocks at around 6 meaning a 1% increase in demand leads to a 6% increase in prices.

If retail is 10% of the market, and doubles to 20%, that would imply a 60% increase in prices
Windsun33 profile picture
Not really - many of the stocks pushed on the social media and then bought/sold on Robinhood have a very small float, so volatility is much higher. One stock I looked at had more trades in one day than the total amount of shares.
Long-Short Manager profile picture
This observation only makes sense at an aggregate level if retail money invests randomly. But if retail money all piles into a few concentrated positions based on these popularity lists, then restricting to just the market cap of these few stocks retail money could very easily be ALL the money. Institutions generally stay out of microcaps apart from a few dedicated microcap funds. Also the majority of institutional money is in QQQ or S&P1000 names.
Comments3409 | Following
I lost huge trying to ride daily calls on AAL today. Almost completely out of money. Stepping away until November 20 market close- I sold the $9 puts for November but my effective cost at November 20 close is 9, not 7- because of the losses trading today- really sick! Well, we'll see- probably AAL loses 80% by November now. @kimbillro @jaberwock
Is it me or are you copying and pasting this same exact thing in multiple threads?
@SchwingTrader Very astute my man! I am telling you- finally sick of the game- every last cent goes in AAL at $9 at November options expiration from selling puts- guarantee you it goes not just under 9 but probably under 1!
Speaking of bubbles, I find it interesting that there are ads at the top of this article touting Electrovaya, probably the longest-running joke on the Toronto Stock Exchange.
Jaberwock Research profile picture
We don't all get the same ads. Ads for Electrovaya will be appearing on your page because you have searched for Electrovaya or something connected to it in the recent past
chaptal profile picture
@templetooth @jaberwock I am getting Electrovaya ads as well, and I did not know the company before and have never searched it. could be because Electrovaya is now mentioned in this thread... or they are in the pump phase?
Jaberwock Research profile picture
I am getting them too, since I mentioned them in a comment
Unless we start heading towards Thunderdome territory (MadMax), the world will recover and the market will be fine. This article is essentially telling swing-traders, day-traders, and shorters that chit’s about to hit the fan. For retail/regular investors, just go LONG. I’m not talking about months, I’m talking about 3-5 year increments LONG. Once you hit your 3-5 year mark, reevaluate/reassess and reposition (if needed). Regardless whether the prices continue to dip, now is still the best time to INVEST (not TRADE).

If you want a 1000% guaranteed way of losing money fast: chase the prices, swing trade or go short. In other words, don’t do those things I just mentioned. LoL
adamsam88 profile picture
There have been dozens if not hundreds of articles on SA preaching this whole rally is a massive bubble.
Meanwhile, investors with the guts and money to take the risks have been seeing massive wins on a weekly basis.
If you believe that companies like Wells Fargo, Air Canada, Sienna, SmartCentres, Shell, and other major industry leaders will be around by 2030, then the current pandemic is just loud noise along your investment journey.
If you are trying to time the market, you might as well go to the roulette table and bet red/black.
Sometimes you'll win and feel smart, sometimes you'll feel lose and say I knew it....Either way you're wasting time.
jz10 profile picture
Just because a company will still be around doesn't mean the current shareholders will still own the company. GM is still around, remember what happened to their pre-2008 shareholders?
Shorting Tesla and going after Ethan Brown and Beyond Meat. I would never. Actually I would buy more of the two companies . Good luck shorting two of the best companies of 2020.
SelbyRoyal profile picture
To believe that a company is great is entirely different from believing it to be over-hyped and overvalued. I, for example, is in love with BYND and their products, but would never buy their share at the current price.
Thanks for your input. I buy great companies that make great products. Tesla and Beyond trade at premium because of it. Actually you should have bought Beyond at 50$ and Tesla at 100$. Right now you would be happy. I’m a Beyond shareholder and believe the company is a pioneer. The author is obviously short and I think it’s dangerous. He is right though that Tesla and Beyond are expensive. He is wrong and biased when he decides to use classic pump and dump companies in the same article. I don’t like short thesis, shorts, I think they like to see companies fail. But they are welcomed, Ethan Brown said he would prove them wrong. I’m in.
SilverSun profile picture
Pioneer on what ? There are no patent barriers and there are at least a dozen of companies with similar products. BYND is massively overvalued, personally I wouldn't even pay $30/sh .
aftermath23 profile picture
Many retail investors are out of work with no retirement savings and desperate for a quick fix solution to their financial woes. They are taking their stimulus checks and gambling on penny stocks hoping to dig out of the hole they are in. One way or another American society will pay for this. There needs to be a better solution to the retirement crisis than the stock market. Most people are simply not educated, prepared, and capitalized enough to trade/invest properly.
chaptal profile picture
@aftermath23 are you serious? I heard the stimulus checks were necessary for basic necessities. I doubt people who have 1,200 USD to their name are buying penny stocks. I hope they are not.
Jaberwock Research profile picture
This article from Zerhoedge has a chart of where the $1200 was spent. A lot of it went to buying stocks.

The $1200 wasn't just sent to people in need, it went to everyone, whether they had a job or not.

My wife got her $1200, and she hasn't lived in the USA for almost 50 years
Tesla's share price is not caused by a bubble.
It's caused by recognition of Tesla's disruption potential.
You think it's high now. You ain't seen nothin' yet.

Windsun33 profile picture
Double Bubble. One of the most over priced stocks on the market.
Buyandhold 2012 profile picture
"Investors chase popular stocks as the bubble inflates....."

It is always a mistake to overpay for a stock.

I don't like to buy stocks with PEG ratios higher than 2.00.
Windsun33 profile picture
My PEG limit is usually around 5'ish. But I see some "hot" stocks in the 100+ range or none.
SilverSun profile picture
Rookies are prepared to pay whatever price for popular brandnames. Most tech stocks scare them s..t out of me at these valuations. On the other hand, this makes me , a value investor, still able to find opportunities.
Here we go again. Using a number and a ratio to buy a stock. Buy the story.
chaptal profile picture
this is an excellent investigative piece jaberwock. thank you. I have been following the madness of crowds for years but wasn't aware of this Robinhood effect. might create an account and buy some puts. the adrenaline of Vegas from my own sofa...
You get a free share with the established account
So out of the millions of Robinhood users ~40k are novice and irresponsible, got it.
what the herd heard drives the market. what the herd sees is sure to please.
what the bird didn't see was that WINDOW!!!
If you use reddit, look at r/wallstreetbets


This is where the retail herd communicates. More than 1.2 million members, and that doesn't count the people who read the subreddit but haven't "joined" (like me, for example).

The daily trading thread is where the pump happens (a stock ticker is floated, and people understand that it's going to be "hot", for example, DraftKings). Sometimes a ticker is floated under the guise of a "due diligence" post, as happened with Lumber Liquidators.

It's market manipulation through social media herding.
Windsun33 profile picture
Yup, seems like you are correct. I never paid much attention to those because there are so many scams, but did a search on various social media sites for $GNUS and it is the classic pump and dump across several platforms.
Jaberwock Research profile picture
Many of the Reddit posters are using Robin Hood as their broker, you can see an uptick in users invested in Draftkings and correlate it with the comments on Reddit.
@jaberwock You are correct, r/wallstreetbets seems to be primarily RobinHood users, and almost exclusively option trading (buying short-term calls and puts)
Sanjay John profile picture
Well you close Vegas this is what happens.
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