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The S&P500 closed yesterday at 3855.36, which is up 72% since the March low close of 2237.40. At the same time, COVID-19 still rages, the vaccine rollout is proceeding slower than expected, lockdowns and travel bans remain in place, and unemployment, while down from its peak of 14.8% in April 2020 is still 6.7%, almost twice as high as before the Pandemic. The market, however, remains sanguine, with some individual stocks experiencing wildly bullish moves.

A recent study in the National Bureau of Economic Research and an analysis of Call volumes and on-line sites like Reddit reveal lottery-like buying behavior that may be contributing to the bull market’s resilience.


Researchers in Germany used data from German banks to analyze trading activity and mobile phone use. The study used a sample of over twenty-two million transactions by approximately one hundred and eighty thousand investors.

Among other conclusions, two were stunning:

1. Low price - First, they found that the introduction of smartphones increased the number of “lottery-like” trades, which they define as buying stocks with very low prices (cheap) in the hope of outsized returns. “We find that the probability of purchasing risky assets increases in smartphone trades compared to non-smartphone ones.”

2. Chasing performance - Second, smartphone trades involve assets with “higher volatility and more positive skewness.” In other words, smartphone usage caused investors to chase returns. As the researchers put it, an increased “probability of buying assets in the top decile of the past performance distribution.”

From the study: “Using transaction-level data from two German banks, we study the effects of smartphones on investor behavior. Comparing trades by the same investor in the same month across different platforms, we find that smartphones increase purchasing of riskier and lottery-type assets and chasing past returns. …. Smartphone effects are not transitory.”

So, the introduction of smartphones increased risky investing behavior or buying stocks either simply because the stocks have a low price or simply because they have recently performed well. Neither of these is the recommended or proven strategies for good performance in the stock market.


Deutsche Bank has noted that Call volumes began surging last year and are much higher than Put volumes. In addition, the Call buying is focusing on short-term, out-of-the-money Call options. Garrett DeSimone, head of quantitative research at OptionMetrics, said “What we have seen is a focus on short-term, out-of-the-money call options because they have these lottery-like payoffs.” Finally, investors gather at on-line sites like Reddit, to target stocks with high short interest.

This Call buying focused on low priced, high short interest stocks is to blame for moves we have seen in stocks like GME, which is up over 300% in the past 2 weeks. GME short interest days to cover is 6 days volume.

So, the strategy involves buying inexpensive Calls, that have little chance to be profitable, in stocks that have less than stellar fundamentals – witnessed by the high short interest, and crowdsource investing to force short-sellers to cover.

“The bigger concern among some market veterans is the disconnect between price action and market fundamentals.” -WSJ/Marketwatch*

Taken together, the evidence of lottery-like activity related to mobile phone use and trading and lottery-like activity in the options market is worrisome. Historically, strategies that do not involve analysis of underlying securities and the normal rules of risk and return end badly. Two recent examples would be the home buying rally of 2004 to 2007 that relied on mispriced Mortgaged-Back Securities and the TECH bubble of 1998-2000.

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