Buzzy ETF set for launch as Rocket Companies blasts off, Budget Day looms for UK markets

If you thought the meme stock craze was going away, think again. VanEck Associates will this week launch a new exchange traded fund (ETF) that seeks to track the performance of the top 75 most buzzy companies on the internet. The VanEck Vectors Social Sentiment ETF (BUZZ) will track the BUZZ NextGen AI US Sentiment Leaders Index. This index consists of the most-favourably talked about stocks online, whether on blogs, social media or Reddit. The companies must have a market cap of at least $5bn.

Dave Portnoy, the meme stock pumper in chief who has attracted a huge following on Twitter, announced the launch yesterday by tweet. Portnoy is a part owner of the business (Buzz Holdings Inc) which licenses the index to VanEck.  

So how are these 75 stocks selected? The marketing bumf makes big claims about Artificial Intelligence and advanced learning models. It claims that the ETF will comprise the 75 large cap US stocks that show “the most positive investor sentiment according to our analytics models”. Pretty standard, but it continues: These stocks are selected and scored using “artificial intelligence”, including “machine learning” and “natural language processing algorithms, applied to millions of data points aggregated from social media, news, and blogs”. Wow, this sounds super clever, with AI it’s bound to work, right? 

Well perhaps, but also perhaps not. In the index guidelines document, under paragraph 1.6: Decision-Making Bodies, the owners say that “a committee composed of staff from Buzz Indexes Inc. is responsible for decisions regarding the composition of the BUZZ NextGen AI US Sentiment Leaders Index as well as any amendments to the rules”. So, there are clever AI algos at work, that I have no doubt, but the ETF doesn’t auto-rebalance based on that machine learning, it simply gives Portnoy and co some data to consider (or ignore, as they see fit) when deciding which of their meme stocks they want to pump add to their ETF. The Committee will also decide about the future composition of the index “if any Extraordinary Events should occur and the implementation of any necessary adjustments”.  Looks like it could be a very lumpy mixed bag of stocks with no correlation to each other except Reddit mentions. But as we have seen, on a short-term basis Reddit mentions is delivery alpha.

Case in point: Shares in online mortgage firm Rocket Companies (RKT) surged 71%  after it came in for the Reddit /r/wallstreetbets treatment. It seems heavy short interest (about 45% of the float) in the stock was exposed, driving a jump at the open and the dam burst once heavy open interest in $30 call options were triggered, fuelling another dealer gamma squeeze like we have seen with GameStop. Some traders had spotted some unusual options activity the day before coupled with a lot of comments on /r/wallstreetbets on RKT. Perhaps a scanner for this sort of thing is not a bad idea (our Sentiment tools suite has been doing this for years). It’s indicative of the fact this socially-driven trading is here to stay and will result in frequent unexplainable (on a fundamental/news basis) jumps in certain stocks.

Back to normality and it’s Budget Day here in the UK. No Glenfarclas for Rishi Sunak, only Coca-Cola imported from Mexico; at least according to a rather awkward conversation he had with a couple of school pupils that has been turned into a viral TikTok hit. A lot has been pre-announced (leaked), but we still expect the rabbit out of the hat moment – perhaps not immediate tax hikes, perhaps direct stimulus cheques for all (this works better than furlough) but that would be too much to ask. Sunak will display a total lack of imagination, Eat Out to Help Out mark II, for instance, more furlough and measures to stoke house prices, or the housing market, whatever way you look at it. Housebuilders are higher again today – if there is no extension of the stamp duty holiday they would pull back. Overall I think the market will like it as it will amount to more stimulus today, and despite the recent jump in yields I don’t feel the bond vigilantes are anything like strong enough to really take on gilts today.

Stocks moved higher in early trade, with the FTSE 100 testing 6,700, the Feb 25th high, and European markets also churning higher towards the top of recent ranges. The DAX struck a record high Frankfurt, boosted by recent comments from ECB members who have sought to push back against the rise in bond yields. Executive Board member Panetta yesterday voiced the ECB is having none of it: “The steepening in the nominal GDP-weighted yield curve we have been seeing is unwelcome and must be resisted. We should not hesitate to increase the volume of purchases and to spend the entire PEPP envelope or more if needed.” 

US stocks closed weaker on Tuesday as the tussle between bulls and bears continued following Monday’s jump. The S&P 500 is trapped in a range between 3,800 and 3,900 – a close above or below these levels will be important for the future direction of the market. Futures trade higher this morning. 

Whilst the Fed has tried stay relaxed about the recent jump in bond yields – which has stabilised this week – it’s clear they are far from ignoring the situation. Fed governor Lael Brainard said the recent surge had ‘caught her eye’. “I am paying close attention to market developments,” she said, adding that “some of those moves last week and the speed of the moves caught me “. Ms. Brainard said she would be concerned about any “disorderly conditions or persistent tightening” in financial conditions. 

OPEC and allies are faced with the usual tough decision on how to maintain the balancing act of too much supply vs too many output cuts. Yesterday there was no recommendation from the technical panel, but this is normal. OPEC is fairly bullish on demand and sees oil stocks dropping by about 4000m barrels in 2021. Crude prices are testing the mid-Feb lows ahead of the meeting; perhaps indicating some short-term fears that Russia will push for an even greater boost to production in the wake of prices stabilising. I’d expect the 23-nation OPEC+ group to agree to reduce 7m bpd of cuts by another 500,000 bpd from April and that Saudi Arabia will confirm the additional 1m which it removed from the market will return in April. Steep backwardation in the futures markets signals healthy deficit for producers to fill.