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These wild stock moves will end badly for investors, DoubleLine’s Sherman says

Traders on the floor of the New York Stock Exchange.

Source: The New York Stock Exchange

Investors riding the wild price surges of some of Wall Street’s most hated stocks could be the ones to get crushed once the trend reverses itself, warned Jeffrey Sherman, deputy chief investment officer at Jeffrey Gundlach’s DoubleLine Funds.

Sherman cautioned that the same momentum that has pushed up stocks such as AMC and GameStop can turn the other way quickly as greed kicks in – and amid some questions over potential regulatory violations.

But that snapback could have consequences for the entire market for trading that is rekindling some of the wild retail investor enthusiasm that accompanied the dotcom mania at the beginning of the 21st century and other infamous bubbles.

“I don’t think it ends well,” Sherman said in a phone interview. “It’s very, very strange. This is the euphoria of market tops. I’m not saying we’re going to have an imminent crash, but it definitely reeks of bubblish-type corrections.”

The market has been in tumult this week as a band of retail traders that hooked up through Reddit’s wallstreetbets group and other social media outlets has turned the market upside down. They have combined to buy shares of heavily shorted stocks and make huge profits.

However, the instability has created broader market losses, as institutional investors have been shaken out of their bets against the respective stocks and have taken huge losses. The Dow industrials fell more than 2% and the Nasdaq was down 2.6% following the tumult.

“There’s got to be some regulatory effects somewhere. This is market manipulation,” Sherman said. “These things just can’t continue to persist. It is some form of collusion. But I don’t know if it’s prosecutable.”

“They may make a poster child out of someone on this,” he said of regulators.

The Securities and Exchange Commission did issue a statement saying it is “monitoring the on-going market volatility” and is “working with our fellow regulators to assess the situation.”

Sherman said investors are best advised to avoid the hype surrounding the stocks and stick with fundamental analysis.

“This is something where it builds hubris,” he said. “It builds confidence, and then people will get reckless with their positioning.”

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