Markets are stuck in a wheelchair while another day of retail-led frenzy over short selling stocks is about to go live.
In case you thought the trading craze was a limited battle between Internet daytime brokers and Wall Street hedge funds: video game retailer GameStop was one of the most traded stocks in value in the U.S. on Wednesday.
Amateur investors, many based on Reddit’s WallStreetBets group, are entering heavily shorted stocks, driving prices to astronomical levels and forcing hedge funds to sell bigger and safer bets to cover losses.
Selloff is creeping into other investments and scaring the sentiment off. The main indices fell 2% to 3% on Wednesday and are expected to continue surfing.
A must read: Tendies? Diamond hands? Your guide to the jargon of WallStreetBets, the Reddit forum that fuels Gamestop’s wild rise
Our call of the day comes from US stock researchers at Jefferies, led by global stock strategist Sean Darby, with a bonus call by Sébastien Galy, strategist at Nordea Asset Management.
The Jefferies team made it clear that the correction in stock prices has little to do with the fundamentals. Rather, what is happening is a reflection of a “change in sentiment in some of the most overbought and speculative parts of the market”.
The group’s retail speculative index, measuring the deviation from the asset trend where the value is difficult to determine, is high at 4 standard deviations. “So there is a lot of air to get out of the riskiest financial assets,” said the team.
Darby’s team noted that the short-term concern is whether the “burst” of riskier parts of the market will create a domino effect, as conventional stocks are liquidated to contain losses.
Galy, from Nordic asset manager Nordea, echoes Jefferies’ caution about a broader sale. He also says that it is too early to buy the dive, because there is more to come.
The big moves to cover short positions at a time of high leverage usually force more deleveraging, said Galy. This is because the restriction on capital due to the risk of investment losses is increasing.
“As a result, the cost of hedging the risk of falling has increased dramatically,” said Galy. “This risk reduction may last for a few days, followed by a strong recovery driven by liquidity in the US and, to a lesser extent, in European equities.”
Galy said that even a peaceful meeting of the Federal Reserve on Wednesday could not reverse this market, which is another sign that it could last.
The buzz
GameStop GME Actions,
reached the $ 500 pre-market level before backing down. The stock was only $ 19 in 2021. Fashion brand Nakd NAKD,
it is another action that made a big leap in the pre-market, with an increase of 130%.
In a filing with the Securities and Exchange Commission this morning, the AMC AMC theater chain,
revealed that the company’s convertible bond holders chose to convert the notes into shares, as the company’s shares have risen about 330% since Tuesday.
Apple AAPL,
Facebook FB,
and Tesla TSLA,
reported earnings after yesterday’s close. The tech giant Apple hit $ 100 billion in quarterly revenue for the first time, smashing expectations, as social media company Facebook also surpassed estimates, with sales up 156% from “other revenue” – like headphones from virtual reality and video chat devices. Electric car maker Tesla reported its sixth consecutive quarter of profit, but it failed to meet expectations.
But if you can take your eyes off the stock market, it’s a big day on the economic front. Initial and ongoing claims for unemployment benefits are due at 8:30 am EST, with about 875,000 people who must have filed for unemployment last week. The gross domestic product numbers for the fourth quarter of 2020 will come at the same time, before the new house sales figures for December are released at 10am.
After the Federal Open Market Committee decided to keep monetary policy stable yesterday, Fed Chairman Jerome Powell gave peaceful signals that the central bank was not finished restoring the health of the economy devastated by the COVID-19 pandemic. “We haven’t won yet,” he said.
The markets
It feels like another wild day on Wall Street. Yesterday’s turmoil saw the Dow Jones Industrial Average DJIA,
drop of more than 630 points, and YM00 stock market futures,
ES00,
NQ00,
are pointing down, set to continue the sale. Asian NIK markets,
HSI,
HSI,
fell across the board and the European SXXP indices,
UKX,
DAX,
PX1,
are firmly in the red.
The graph
Our chart of the day, by Marshall Gittler from BDSwiss, shows how the S&P 500 SPX,
had the biggest drop since October 2020, and the expected volatility VIX index had its biggest increase in one day since the COVID-19 pandemic in March 2020.
The tweet
When sharks search for fish. Billionaire businessman and investor Mark Cuban – famous for “Shark Tank” – is rooting for Reddit’s WallStreetBets traders.
Random readings
An Oklahoma lawmaker proposed a Bigfoot hunting season with a new bill.
Key West wants to ban people from feeding fat, wild and free-range chickens.
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