Here are 4 signs that markets are looking frothy in 2023

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Seemingly everywhere investors look, markets appear to be booming in 2023, a stark turnaround from the doldrums of 2022.

Meme stocks, technology shares, bitcoin — all have risen sharply this year, catching the attention of bears, who see signs of frothiness in many corners of today’s markets. Meanwhile, bulls maintain that this is an exaggeration, and that calling signs of a bubble would be premature.

“These valuations are unsustainable,” Tavi Costa, portfolio manager at Crescat Capital, told MarketWatch in an interview.

Outside of cash markets, demand for call options, which represent bullish bets on the market, has also improved markedly in 2023.

Even with short-dated Treasury yields offering investors 5% returns with little risk, some market strategists see scope for the rally to continue.

“Early bull markets feel like this,” Cox said during a phone interview with MarketWatch. “I think investors are playing catchup which is typically what you see early on.”

Here’s a look at four corners of the market where frothiness is most evident.

Meme stocks

GameStop Corp.
GME,
+0.54%

kicked off the “meme stock” trend when it soared north of $400 a share in January 2021.

Many meme stocks are tied to money-losing businesses, but this hasn’t stopped the Roundhill Meme ETF from rising nearly 59% so far this year, FactSet data show.

Bitcoin

Despite a crackdown on cryptocurrency businesses by U.S. authorities, bitcoin has seen its price rebound sharply off its lows from late last year.

The pioneering cryptocurrency
BTCUSD,
-3.41%

has risen 80% year-to-date to $29,856 per coin.

Its gains have helped benefit many crypto-linked stocks as well: MicroStrategy Inc.
MSTR,
-4.49%
,
which holds more than $4 billion bitcoin, saw its shares up more than 210%.

Riot Platforms
RIOT,
-6.62%
,
a crypto miner, has seen its shares rise 440%.

See: Why some crypto stocks have surged up to 400% this year, outperforming bitcoin

Cathie Wood

Megacap technology stocks like Meta Platforms Inc.
META,
-0.80%

and Amazon.com Inc.
AMZN,
-1.13%

have garnered plenty of attention in the headlines.

But many smaller technology firms have been swept higher in the behemoths’ wake. As a result, Cathie Wood’s flagship fund, the ARK Innovation ETF, has gained more than 50% this year, according to FactSet data.

To be sure, the fund has benefited from having Tesla Inc., one of the so-called “Magnificent Seven” group of megacap stocks along with Meta and Amazon, as its top holding. Tesla shares are up 111.09% year-to-date at $260.02 per share.

See: Amazon is the cheapest of the Magnificent Seven stocks by this important measure

Coinbase Global Inc.
COIN,
-4.25%
,
ARKK’s second-largest holding, is up 184.9% so far this year, far outpacing bitcoin’s gains.

Call buying continues

Investors have been piling up on equity call options this year, a sign that traders expect the 2023 rally to roll on.

On July 11, the CBOE equity put-call ratio hit an 18-month low below 0.50. The gauge compares demand for put contracts on U.S. stocks and exchange-traded funds (including index-tracking funds like the SPDR S&P 500 ETF
SPY,
+0.23%

) with demand for call contracts.

The gauge stood at 0.60 late last week, on par with its five-year average.

Calls represent bullish bets on the underlying stock or index, while a put represents a bet that the underlying asset will fall.

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