Market Musings 30/01/21: The Revenge of the Little Guy(s)

30th Jan by Edmund Shing

26 comments 3154 reads

The Revenge of the Little Guy(s)

Summary:

Market volatility has risen sharply, partly due to the Gamestop saga
January’s top-performing sectors and themes include Biotech, Clean Energy and Tin
US Q4 2020 earnings results have so far been very positive, and should lead to earnings upgrades for 2021

Suddenly everyone has heard of Gamestop and Gamma Squeezes!

After the week that was, even my 16-year old son W has heard about the Gamestop story, and is asking me to explain what it is all about.

I will not bore you all with yet another explanation of what Gamestop does (a US store chain selling video games), why hedge funds were so keen to short it or what a “gamma squeeze” is. But here is the result on the Gamestop share price (thus far)...

Gamestop has gained > 1800% in January 2021!

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Source: tradingview.com

For those of you seeking a detailed explanation of the Gamestop saga thus far, read this article.

This new retail investor-based phenomenon (using online trading platforms like RobinHood) has not just been confined to GME Gamestop. Indeed, if we look at a basket of the most heavily-shorted stocks in the US, we can see that they have performed incredibly well as a group over the last few months, far better than the overall S&P 500 index. For an explanation of short selling, short interest, and short squeezes, read this Investopedia article.

Most heavily-shorted US stocks have done very well recently

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Source: Bloomberg

This has definitely caused a lot of pain to hedge funds who sell shares short (aiming to profit from a fall in prices), with many of these popular short positions losing a lot of money for them. For a list of the US companies currently shorted the most (led by Gamestop), have a look at this list.

This retail investor phenomenon has certainly caused some volatility in stock markets, with the US VIX volatility index (often called the ‘Fear Index’) jumping up to an elevated level of over 30 this last week, while still below the peak levels seen in March, June or October of last year..

Stock market volatility has spiked higher

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Source: tradingview.com

Correction concerns...

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RayStraw

31st Jan

I disagree, why should you be able to sell something, you don't own with the hope of buying it at a lower price? I think it is fundamentally wrong. You can't do that with other property.

Shorters often produce damaging reports as well. If these groups such as Redditt, which now has 6m members, start shorting stocks then we will see even larger problems and it could bring down companies or even crash the market.

Westway001

I agree that there is nothing fundamentally wrong in betting that a share price will fall but that the issue is the market manipulation which often accompanies it.

It’s all getting out of hand. I’m reading that you could not even buy Starbucks on some platforms last week, because the shares had gone down, where will it end?

Who is manipulating and controlling the market? I can’t see any reason to block buying in companies such as Starbucks, AMD and GM.

BarrieLomas

The Redditt Scandal has so far allegations that research showed the data showed the shorts were leveraged beyond 100% of the companies shares! If so this was self inflicted disaster waiting to happen.

During the same week an UK AIM company was seen to have problems with “ALGO versus Market Book trading”. Example: an Algo with an upper buy limit was willing to hoover up stock, which is why whenever there was any selling, the Algos match it to the buy order and the buys increase to cover etc. Company had many hundreds of trades it was a closely danced Tango, or a matching duel with a very narrow price difference over the entire day. I will not repeat the allegations about why a concert party was doing this. But it was another blatant Market manipulation in action noted by alert PI’s

Big Boys are crying foul when Private investors, who have the will, ability, and equipment to uncover their attempts market manipulation. Beware of “algo’s and book trades” dancing close together

Delta neutral

luckily in the U.K. as far as I know you are not allowed to put that level of stock out on loan and am amazed it is allowed in the States- madness. The whole business of being able short the market fills a lot of pockets in the City from stock loan desks of the banks to a bit of extra return for the funds lending stocks. Algorithm trading is probably one of the most blatant legal abuses of the market in my humble opinion as are dark pools. The exchanges only allow it as it creates the impression of a liquid market and gives them higher trading fees.

Anthony127

1st Feb

I strongly agree with the view that you shouldn't be able to sell something that you don't own. Short sellers are bettors on failure and only make money when money when someone else loses money. Short selling is often accompanied by stock manipulation and is the ultimate approach in making a fast buck.

Short selling is often banned by Governments in times of economic stress and I think the Government should seriously consider it's future. Short sellers in the past have identified accounting scandals i.e. Wirecard but these type of issues can be identified without short selling and actual selling by real owners also works!

There is I feel a definite distinction to be made between investing and betting, in my view it would greatly benefit the economy if short selling was banned. I would also like to see genuine investing being supported by capital gains tax laws which promote longer term investing over short term bets and believe that this would benefit the economy.

chrisgb

5th Feb

I have suddenly wondered - what happens if a short seller goes bust before returning the shares to the original owner? Presumably the shares are lost to the original owner, hence, surely, the original owner has a vested interest in the short seller not going bust. Surely therefore the original owner is going to do a deal in which the short seller is given more time to repay the shares. If that is the case, surely the short sellers are just going to wait until there is a collapse in the share price.

UK_Investor_8888

Its not being going well for the GameSpot investors... USD 71 at the moment. I imagine a lot of kids of got caught up on the wrong side of that.

Wilkonz

6th Feb

A couple of hedge funds didn't do so well either.

$GME was up yesterday as Robinhood lifted their restrictions.

Zoiberg

I see the price of silver spiked up on Feb 1st and spiked down on Feb 2nd. Anyone shorting Gamestop at its height would have done incredibly well. I don't believe gravity can be defied indefinitely and I believe that the hedge funds are cognisant of this.

I personally believe that this isn't a game changer but a short lived phenomenon.

Yes they moved the price of silver about 10%, some shares went up around 20% such as Fresnillo (LON:FRES), which was good for me as I was looking sell them anyway.

Not sure which way this will go, these groups have shown they can move the market, if they do become larger, then they will have more influence. Anyone who bought in early on Gamestop would have done extremely well, going from around $18 to $480 in a matter of a few weeks.

Some platforms have banned or restricted buying of shares in these type of companies, on £IG platform I could not trade anything for about 1 hour, 3 days running, after the US markets opened, other platforms have had similar issues also. I think this is crazy and these platforms need to improve their systems.

Lordyjordy

7th Feb

Is it not also true that the very large majority of hedge funds over the long term actually fail to beat the market. Remember Warren Buffetts bet that over a 10 year period the market would out perform them and then challenged them in a 1 million bet to prove him wrong. Buffet won the bet.

Looked at from this point of view people who actually invested via the hedge funds actually transferred their wealth to everyone else.

In agreement with you timarr - I just don't understand banning hedge funds on the basis they take short positions. Is it any more sinister than going long?

If you said that they should be banned because they (at their clients cost) charge ridiculous fees and do very nicely for poor performance then I can understand it. However the client made the choice to invest with them.

IGotPoesJacket

Look up fungible.

And if you ban selling things you don't own, you have to ban options trading - i.e. buying guesses on the future price of things you don't actually want to own too - so that's the derivatives markets (puts and calls) gone in your crusade.

Your plan will just kill liquidity and not add any benefits for investors.

Finally, if it wasn't for short sellers I wouldn't have been able to buy back into Boo for 208p. Shorts sold millions of shares and "genuine investors" (whatever they are) managed to load up. If it wasn't for short sellers there would be no-one investigating ESG issues or exposing frauds - there'd be no incentive to do it as "stocks only go up" mentality would take hold (as it has in the US recently).

Yeah, I bought Boo at 208p - they closed at 364p Friday. This PI is very happy to have shorts bring down the price of good companies - the truck gets backed up and we squeeze the shorts into a world of hurt.

Other property isn't fungible.

9th Feb

IGP

You make some interesting points. Short selling can create opportunities in shares that are unfairly sold short and perhaps this was the case with Boo. In these cases I think a short squeeze is a reasonable response.

My main reason for disliking short selling is fairly philosophical in that I am against the competitive spirit which involves making money but only when someone else has lost money. My distinct preference is to invest in the success and/or future success of companies rather than bet on the failure of companies. There is a good deal of abundance in the world which means I think there is no need to take the short selling route.

andywillz94

7th Jun

Made a healthy profit off this bizarre situation. For anyone not following, the price has ticked back up to $280 dollars as i type, having dropped to lows of $40 following the intial gamma squeeze ($480 peak). The company seems to have garnered an exceptionally loyal following to whom price means nothing, and continue to buy on -30% dips as well as 30% increases.

I find it a fascinating situation. Whilst there is an exceptional amount of speculation, it was confirmed that the short interest in the stock was at 140%. How this is possible, let alone legal, is beyond me. to my understanding, 'Naked Shorts' are not permittable. so i put my allocated 'punt money' in to this after seeing how genuinely angry the reddit army was at the apparent attempt to crush their favorite gaming store - turns out to have been my best decision since i started investing.

The current view is that the Hedgefunds did not cover their short positions after the intial squeeze, and are continuing to short the stock. So everyone just holds or buys more, and its costing these funds a fortune in interest on their short positions.

Has anybody else kept up to date with this? I'm along for the ride because i see an insane amount of upside 'IF' they're right, and i can't lose at this point. They do all sorts of DD over on the reddit forum, most of which does seem to be to support their confirmation bias.

Does anyone else have a view, or decided to take a punt and ride the wave? Be interesting to hear opinions over here as i suspect the demographic is wildly different.

8th Jun

The GME / AMC scenario is undoubtedly one of the most interesting duels between bears since Tesla last year. A great spectator sport, with some useful lessons about how the market works. Going short on an already heavily shorted stock is a dangerous game. But my innate risk aversion keeps me firmly on the sidelines rooting for the bulls.

Thanks for the input, Wilkonz!

Today was not for the faint of heart - up to 340 from 280 within 30minutes of opening, and quickly shorted back down, with a final closing price of 300USD.

I dont know how high this will run and im not bothering with day trading it (i'll probably get burned) but i sure am enjoying the profits!

Cheers, Reddit!

Market Musings 30/01/21: The Revenge of the Little Guy(s)

The Revenge of the Little Guy(s)

Suddenly everyone has heard of Gamestop and Gamma Squeezes!

Correction concerns...

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Edmund Shing

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