According to Zhitong Finance APP, on Tuesday during the trading hours of the US stock market, investor concerns about an overheated US stock market dominated, leading to declines across the three major indices, especially with the hottest stock under the "donald trump" trading wave, Tesla (TSLA.US), which dropped more than 6%. This highlights some risk assets in the market feeling bubble-like after the overwhelming election victory of president donald trump and the high probability that his republican party will win both houses, causing extreme optimism in the market. Additionally, some of the riskiest stocks, known as "bubble barometers," experienced sharp declines after short-term surges, demonstrating the vulnerability of the "donald trump" trade and the gradual fading of this trading wave.

On Tuesday, many of the hottest "donald trump" symbols since last week experienced extreme fluctuations before the important CPI inflation data from the USA was released on Wednesday. In particular, small cap stocks, which tend to be more sensitive to economic conditions than large cap stocks, fell sharply from historical highs. Stocks with concentrated put bets also dropped significantly, as did speculative technology stocks that are yet to become profitable.

The trading price of the hottest risk asset, bitcoin, fell sharply from record historical highs and then slightly recovered. The stock price of Tesla (TSLA.US), led by the world's richest man Elon Musk who is stubbornly "all-in" on trump, fell from a two-year high.

Musk's influence, betting on "king trump," is likely to grow exponentially across both political and business circles; Tesla is undoubtedly the strongest "donald trump" concept stock, and its price surge far exceeded that of the "purest blooded trump concept stock"—Trump Media & Technology Group (DJT.US) after Trump announced his victory in the US presidential election.

Even before the recent wave of "donald trump" trades led to a super surge, optimism surrounding some "bubble" risk assets had begun raising concerns among investors about "irrational exuberance."

Considering the relatively high debt burdens of these risky symbols, smaller stocks face particularly high risks when US Treasury yields rise sharply. On Tuesday, the 10-year US Treasury yield, dubbed the "anchor of global asset pricing," continued to rise due to market worries that inflation data might dampen bets on the Federal Reserve's rate cuts in December and next year.

Moreover, it is noteworthy that a benchmark index measuring speculative technology stocks that are not yet profitable is reaching a level that has been difficult to surpass in recent years. Additionally, the indicators measuring heavily shorted stocks are approaching a trading range that suggests a potential reversal may occur.

"The performance of risk assets like bitcoin, dogecoin, and Tesla after the U.S. presidential election indicates an astonishing level of market bubble," said Mike O’Rourke, chief market strategist at Jonestrading. "The market behaves as if every trade is happening in a vacuum, but that is not how the market operates. They are interconnected."

Even after the drop on Tuesday, Tesla's gain since election day has added approximately 250 billion dollars to the market cap of this electric vehicle manufacturing giant. This makes it one of the most notable examples of the "Donald Trump trade" frenzy post U.S. presidential election, although there have been no substantial changes to the core factors affecting Tesla's fundamentals, such as "FSD autonomous driving without human supervision" and Robotaxi. Investors collectively bet that Trump's return to the White House would benefit Musk's electric vehicle company, making a huge wager that Musk would gain the "imperial edict" to navigate U.S. federal government efficiency, advancing Tesla's FSD and Robotaxi approval process.

For the bullish sentiment in the stock market, a significant pullback in the "bubble barometer" does not mean the end of the bull market. Market observers note that there are signs suggesting that the U.S. stock bull market may not be over. This month, the fear gauge on Wall Street – the cboe global markets volatility index (the vix index) has sharply declined, giving traders hope that the U.S. stock market can maintain its strength.

"We are entering a period of the year where stock market volatility should decline, and this decrease in volatility is an important market signal regarding whether the current uptrend can be sustained until 2025," said Nicholas Colas, co-founder of DataTrek Research.

The following five charts of typical "bubble barometers" show the irrational excitement in some areas of the stock market before Tuesday's market "risk-off action." Despite the signs of bullish sentiment in the market, these "bubble barometers" have already warned of a significant retreat in the irrational frenzy triggered by the "Donald Trump trade."

These stocks targeted by short sellers have experienced a pullback after a significant surge.

Before the fluctuations in the USA stock market on Tuesday, risk appetite was clearly reflected in some speculative sectors of the US stock market, driving some highly shorted stocks to soar to historic highs. As of Monday, during the five trading days, the basket of stocks compiled by Goldman Sachs with the "50 stocks with the highest short ratio" rose about 9.5%, reaching the highest level since September 2022.

However, on Tuesday, this typical "bubble barometer" fell by 3.4%, and the short ratio, momentum, and technical trends of these heavily shorted stocks indicate that there may be a significant decline in the future.

The biggest beneficiaries of the "donald trump" trade wave—small cap stocks.

Since the election, those small cap stocks in the US stock market have been among the biggest winners of the so-called "donald trump" trade, with the small cap benchmark—the e-mini russell 2000 index—showing optimism comparable to that of Tesla. The main logic is that investors bet on the Federal Reserve's interest rate cut cycle, and the elected president Donald Trump's promises of tax cuts and "trade protectionism policies" will significantly boost the profit expectations and overall valuations of these small cap companies that focus on the US domestic market, which are generally more inclined toward the US domestic market than large cap companies. However, the problem is that other proposals by Donald Trump, such as strict immigration laws, may push up labor costs and squeeze the already thin profits of small businesses.

The irrational surge in call options.

The options market has also sent extremely bullish irrational signals, indicating that the market's irrational bullish enthusiasm is heating up. After this irrational surge in call options, the stock market often faces a significant correction.

Demand for options contracts betting on the rise of the s&p 500 index has been significantly increasing. On Monday, about 36 million call options contracts were traded across all major US exchanges, while put options contracts were less than 21 million. Before the decline on Tuesday, the ratio of the two was about 1.7, reaching the highest level since January 4, 2022. However, after that day, the s&p 500 index began to enter a nearly year-long bear market.

Soaring to a market cap of over one trillion dollars, Tesla.

Tesla's stock price saw a significant cooldown on Tuesday, yet it is close to the all-time highs seen at the end of 2021 and early 2022 when investors rushed to buy any stocks related to electric vehicles, igniting fervor among investors for the industry leader's stocks. The total market cap of Tesla, the global leader in electric vehicles, broke the 1 trillion-dollar mark last week, and the stock price surpassed the seemingly unattainable 300-dollar level last week. Since Donald Trump announced his victory in the U.S. presidential election, the stock has increased by over 30%.

Some institutional investors have stated that Tesla's recent surge is primarily due to an emotional-driven high valuation rather than a substantive reversal in fundamentals, and caution is needed regarding the risk of valuation collapse triggered by consistently high 10-year U.S. Treasury yields.

Adam Sarhan, founder and CEO of 50 Park Investments, commented: "The market reaction triggered by Trump's victory is undoubtedly explosive for Tesla. While Tesla undoubtedly stands to gain some potential benefits under Trump's administration, the rapid rise in stock price currently seems overly fervent in the short term. However, in the long run, the development prospects for the stock remain optimistic."

However, analysts and market participants hold differing views on the Trump administration's stance on electric vehicles and its potential policy impacts. Wall Street's target prices show that Tesla's stock price faces a 28% downside risk, which is the largest valuation divergence since the technology stock frenzy following the pandemic.

ARK Innovation ETF Frenzy

Other irrational buying trends also point to an irrational speculative frenzy triggered by the "Trump trade": The call options volume for the flagship ETF issued by Ark Invest led by "Cathie Wood" has unusually surged to unprecedented extreme levels not seen in over a year. It is worth noting that since 2023, ARK Innovation ETF has significantly underperformed the s&p 500 index and nasdaq 100 index, ranking at the bottom of the long-term investment returns among similar ETFs in the U.S. stock market. This flagship ETF has maintained a long-term heavy position in Tesla, which is consistently the top holding in the ETF.