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How ‘meme stocks’ and recent retail investor activity are impacting markets

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TD Ameritrade’s chief market strategist JJ Kinahan joins Yahoo Finance Live to discuss the latest Investor Movement Index (IMX) score, which climbed amidst unprecedented retail investor activity in January — including the most popular stocks investors bought and sold — as well as news that Tesla invested $1.5 billion in bitcoin.

Video Transcript

JJ KINAHAN: Back to what we saw last month, pretty incredible, and the fact that we saw our clients taking more exposure to the market than we've seen in a long, long time. We've come out with our Investor Movement Index, which measures our clients' exposure to the market overall. Our clients came out of the gate swinging, so to speak, in 2021, buying a lot of stocks that you would expect them to.

Apple goes into all time highs, AT&T, AMV. But a few of them maybe are interesting, you know, Lemonade led by our millennial clients, the insurance company. So I thought that that one was really interesting. You know, GameStop, AMC, of course, the ones everybody wants to speak about, they really didn't show up for the month, because you have to remember, this started in the last week of January.

So although the trading for two weeks in there was absolutely incredible, overall, not enough to sort of dent the overall monthly survey. But of course, you know, our clients did have big interest in trading both of those names, as is no surprise to anybody.

What I would say is that although they were a bit more of net buyers of AMC than GameStop, and I think that that has to do a lot with the pure price of the stock, but a lot of turnover, so to speak, not like people just getting long and staying long, which I also think was obviously in hindsight, a very good thing.

BRIAN SOZZI: JJ, Tesla's always a top traded name on your platform. How should it trade moving forward in light of this Bitcoin news? Should it trade in lockstep with Bitcoin prices? Should it trade with cash flow for Tesla over the next five years? Should it trade when they come out with a new car? Because I would argue that Elon Musk just made the story a heck of a lot more complicated for the average investor.

JJ KINAHAN: I absolutely agree with you, Brian. I think it becomes very complex, because, let's face it, I think one of the big issues we'll see that many people had going into this was should I trade Tesla as a technology company? Should I treat Tesla as an automobile company? How should. I think of this going forward?

And I think now as a Bitcoin investment, I thought you wisely pointed out, it changes, in my opinion and obviously in yours, how you look at Bitcoin itself in terms of where will this start fitting into balance sheets of major corporations, as well as day to day life.

And the other thing is, I think many of us thought of Tesla more as a technology company in many ways, because if you think about it, their true strength was in the batteries that nobody else could replicate. They had a bit of a head start in terms of the length their batteries could go. They did make cars around those batteries. But the strength of the company seemed to be there.

So now, what does this mean overall? I think it's going to take a little while to figure out. And again, to your point earlier, how does their board and et cetera come and large shareholders feel about this? It'll be interesting to see all the parties that have a voice over the next few months, when they weigh in, and if this philosophy changes for Tesla, a little bit more.

But again, in many ways, I think people will say this is why they invest in Tesla, this is why they invest in Elon Musk. Sees there's nowhere else to really get a great return on his capital and finds one and sends it to a new high. So this is going to be a really interesting story as it unfolds over the next few weeks.

JULIE HYMAN: And you could argue, JJ, that Elon Musk probably understands the sort of memification of investing as well as, if not better than, anybody out there. I mean, he was doing memes and watching this stuff long before this GameStop sort of frenzy.

How are meme stocks playing out on your platform? I know you mentioned GameStop and AMC specifically. But I'm just curious, more generally, is that a theme that you were watching collectively, as a group. Are you trying to find these stocks as they sort of emerge?

JJ KINAHAN: Yeah, I think, Julie, you have to, because you owe it to your clients, and to the firm, and even the industry to make sure that the risk is proper for all of those. We were thrown to a group of companies that had restricted trading. We never restricted trading.

Now we did raise some requirements on trading. But if you had the capital, you could always go in and buy it. You could sell what you were long. The only reason you couldn't sell short is we have to be able to borrow the stock in for a retail client to sell it short. That stock was hard to borrow. We simply could not borrow it in the market overall.

And in terms of options, we were letting people buy calls, buy puts. We were not letting people sell call short. And those are the kind of things you have to watch out for. Why? Because at its height, when GameStop, if you look at when it was trading $300, it's one standard deviation expected move in 40 days was $500.

It's very difficult to put risk metrics around that when you're saying that the stock could more than double, or go to, you know, theoretically, no stock can go to less than zero, but to less than zero. So we do have to watch the risk. So with those types of stocks, a risk scheme is all over it, so just make sure, as are our competitors, to just make sure that the risks are in the proper place.

Our biggest concern, I think there's a narrative out there that, oh, you know, they're just turning around their clients. It's very difficult to go out and get accounts. So when we have them, it's not in our best interest if these people are not successful.

So we spent a lot of time there with education, et cetera. So I guess that was a long winded answer to your question. The direct answer is absolutely, we're watching these stocks, because we want to keep the proper risk parameters in place for people and still allow them to interact with the market.

JULIE HYMAN: Right. You want to make sure that people actually have the cushion here, in terms of trading around it. T plus 2, if that was compressed, how would that affect the market?

JJ KINAHAN: Well, what it would allow to happen is that some of the overnight money wouldn't have to be put up quite as much as you're waiting for stocks to sell. We went from T plus 3 to T plus 2. I'm going to say 2 and 1/2 years ago, I know that the margin of error of me saying that. I just can't remember off the top of my head. But again, this is a major lift for many companies.

You have to remember, when you go to this, every single company involved in the market, in terms of a brokerage, has to update their systems. And so there are some smaller firms that this is a bit of a capital requirement on them.

So overall, there is a push to go to a T plus 1 or a T plus 0. And that's fine. I'll let the regulators kind of decide what they think is the best thing for the market. But it may save some of the capital requirements that we saw happen to firms a couple of weeks ago, because the stocks that are settling, you can get the cash for it in a much quicker fashion and be able to put that up for the current positions that your clients have.

MYLES UDLAND: All right, JJ Kinahan, Chief Market Strategist over at TD Ameritrade. JJ, always great to get your thoughts. Thanks so much for joining this morning.