Beware the 'Portnoy top': A former Wall Street chief strategist breaks down how the day-trading exploits of Barstool Sports' founder highlight an 'unholy speculative mix' infecting stocks
- Barstool Sports founder David Portnoy has made waves in recent weeks for his rambunctious day-trading and encouragement of similar risk-loving investors.
- Yet Portnoy's actions point to a severe dislocation between stock prices and economic reality that risks a return to bearish territory, according to Peter Cecchini, the former global chief market strategist at Cantor Fitzgerald.
- Government stimulus checks accelerated the growth of casual retail investing with discount brokerages like Robinhood, Cecchini said.
- Combine the influx of "found money" with relief from the Federal Reserve and Congress, and the market rally rests on "an unholy speculative mix," Cecchini wrote in a Friday LinkedIn post.
- Visit the Business Insider homepage for more stories.
When the S&P 500 turned positive year-to-date in the final minutes of Monday's session, experts were already warning of an overextended rally.
This was before Barstool Sports' flippant founder Dave Portnoy began pulling his 1.5 million Twitter followers into the market with videos touting hefty gains and unrivaled bullishness. While the media giant notes in his "Davey Day Trader Global" videos that he isn't a financial advisor, he frequently espouses the naively optimistic mantra that "stocks only go up."
Not all observers share his positivity, and some are pointing to it as a perfect symbol for how dislocated equity prices are from the greater economy. Peter Cecchini, former global chief market strategist at Cantor Fitzgerald, deems the phenomenon the "Portnoy Top."
"His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now," Cecchini said in a LinkedIn post on Friday. "It's both impulsive and compulsive. His behavior really just explains everything."
The strategist pointed to a specific tweet to introduce his hypothesis. On Tuesday, Portnoy uploaded a video claiming he "killed" legendary investor Warren Buffett with his recent day-trading success.
"I'm sure Warren Buffett is a great guy but when it comes to stocks he's washed up. I'm the captain now," he wrote.
By Thursday's close, equities had fallen the most since March and dragged the S&P 500 back to a year-to-date loss. Portnoy characterized the session as a "bloodbath," but returned to cheering on wins come Friday morning.
Portnoy's legion of energetic retail investors existed well before his trading streams began in March. The trend emerged last year, Cecchini said, when popularity in zero-fee brokerage accounts soared. Anyone with a smartphone, funds, and interest in the stock market was able to join a flood of speculative bets fueled by hype over fundamentals.
The movement grew more important once the coronavirus pandemic began. Government relief checks created a "never-before-seen dynamic," Cecchini said, noting that the swaths of "found money" drove an influx of capital from casual traders. That new financial ammunition was soon met with trillions of dollars in economic relief from the Federal Reserve and Congress.
"When combined with easy access to markets through platforms like Robinhood, it's an unholy speculative mix," Cecchini said.
Risk-taking activity compounded, and as institutional and retail investors alike rushed back to stocks, prices rapidly recovered. For roughly two months, it seemed as though Portnoy was right in claiming "stocks only go up."
As outspoken as Portnoy is, Cecchini sees him as a symptom of the risk-on zeitgeist. Congress and the Federal Reserve plunged investors into "an unbreakable cycle of addiction to not only monetary policy but also fiscal policy," he said. Portnoy's limitless confidence isn't a call to action, but a warning of the correction to come, Cecchini added.
"This may be the reason why David Portnoy just thinks stocks go up and up ... can he really be serious?" the strategist said. "It's not about him; it's about what the rants represent."
Now read more markets coverage from Markets Insider and Business Insider: