The turmoil in parts of the US stock market, caused by the WallStreetBets crowd, prompted a veteran American broker to abandon his old manual built over decades.
Larry Peruzzi, head of international trade at Mischler Financial Group Inc. and a veteran with more than three decades of experience in the market, said he is spending less time examining the fundamentals of the stock and much more time with techniques and chat rooms.
“At the moment, we are looking much less at the balance sheets and much more at the chat rooms, negotiate quickly and avoid using any valuation during the negotiation,” said Peruzzi. “It doesn’t make sense, but in 2020/2021 would we expect less?”
Markets took a turn for the last week, with day traders invading stocks like GameStop Corp. and AMC Entertainment Holdings Inc. in the hope of squeezing short sellers. It worked: Melvin Capital closed its short position and Citron Capital covered most of its short position with a 100% loss. This made the crowds in places like WallStreetBets confident, even if the activity is attracting the attention of companies like the Securities and Exchange Commission.
Historically, institutional investors have tended to welcome retail merchants because they added liquidity to the markets, said Peruzzi. But it is now causing major trading and liquidity problems, and speculation is growing that funds may be forced to sell some stakes to meet margin calls, he added.
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For now, there is a silver lining, at least for companies whose stocks are being boosted by all activity, said Peruzzi.
“Most of these companies are fallen angels and many are living on borrowed time,” he said. “The upside of all this irrational trade is that, if these companies are able to act quickly, additional stock offers can give them the capital they need to survive.”