I helped start an investment bank back in 2005 in a Central Asian country. Another guy and myself started the brokerage end of the bank, the Sales and Trading Dept. For what it's worth, outside of John Bogle inspired index funds, I do very little on the market and am currently holding cash. This extreme cautiousness is, in part, due to the amount of new retail investors and day traders in the market.
This is from a conversation I had with a Bank's CIO and former colleague (see above):
Perspective is always healthy: "These “reddit board” retail traders that have been credited (or blamed) for the explosions in the stocks give us an interesting insight into current psychology. Some commentators have stated that this is a revolution in financial markets, where the retail traders get to boss around the institutions. The retail traders are angry, people say, and want to “stick it to the man.” We disagree. It’s not a revolution. They’re not railing against the system, they’re embracing it.
What many of these retail traders think they are doing is out-smarting institutions for being short a stock. That’s a sign of extreme bullishness. “What d’ya mean you’re short?! Don’t ya know stocks can only go up?!”
This episode is also a classic sign of incredible excess liquidity sloshing around the markets. A click on your mouse and you can be leveraged to the hilt in a second.
And it is a quintessential display of retail herding behavior, of course. “Join the message board crowd or lose out!”
Excess bullishness, excess liquidity and retail herding behavior. These are all attributes of exuberance seen at historic stock market tops.
Two of the most famous short squeezes came over a hundred years ago. In 1901 it was Northern Pacific Railway, and in 1907 it was United Copper. Both squeezes are still remembered because they occurred just before major crashes in the stock market."
