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We Saw The Stock Market Dump Like This Just A Few Weeks Ago – Mike Swanson (01/28/20210)

Yesterday the DOW fell over 633 points for an over two percent decline and there was selling just about across the board in the financial markets. Gold, though, wasn’t even down one half of a percent showing us once again that it is less volatile and stable than the stock market, although mining stocks got hit with the rest of it for the day.

We saw a day like this after the election in December and I think that has ramifications for how the market is going to play out over the coming weeks and months, but one thing happened yesterday that is a bit different. Even though the market dumped, there was a slew of heavily shorted stocks that simply soared.

Once again Gamestop Corp (NYSE: GME) went up another 135%.

I talked about Gamestop yesterday and on Tuesday, as it is essentially going up in an epic short squeeze. Supposedly traders on a Reddit message board are playing it along with other heavily shorted stocks as it isn’t the only stock now soaring. Koss Corp (NASDSAQ: KOSS) went up 480%.

And movie chain AMC Entertainment Holdings (NYSE: AMC) went up 301%.

These are all epic short squeezes and the traders on the internet, many of whom are apparently Robinhood traders, are celebrating and going wild, but on CNBC and much of the mainstream media there is outrage and a call for regulation as the short squeezes are crushing big money hedge funds short these stocks.

For instance Steve Cohen, whose group has a controlling interest in the NY Mets had to issue a statement reassuring Mets fans that things are fine, giving one such fan a moment of fame.

The two biggest Gamestop shorts closed out their positions yesterday in defeat, while one of them got an over two billion bailout from a couple of other larger funds to continue to survive. Reddit is making the message board at the center of focus private and its Discord messaging group has been banished for “hate speech.”

CNBC had the CEO of Gamestop on in an interview and you can see the annoyance and anger by the anchor. He simply cannot hide it.

At first you might think that is a pure sour grapes if you saw some of the pros express anger over the victory of the small traders playing the short squeeze on giant Wall Street players, but the reality is that the surges in these stocks probably helped contribute to the decline in the overall stock market yesterday, because when giant funds start to take on a big loss in positions like this they can become forced to sell their positions across the board to meet redemptions from worried investors and to simply reduce risks. That creates market volatility and losses for the market as whole, in a brittle one direction market. This is what is behind the hand ringing and cries for SEC action or some sort of investigation coming from some circles.

It’s kinda like when those leveraged VIX ETF’s blew up in the first quarter of 2018.

However, I don’t think we are on the verge of a giant stock market drop right now. The reason why is that the VIX went up over 61% yesterday to close near 30.

The VIX measures the premium that traders pay for volatility in the options market on the S&P 500. It tends to soar when many people in the stock market go into panic and worry about coming losses. They buy puts instead of sell, but scramble so much to do it that they drive the volatility premiums on the puts higher. The VIX tends to spike at the END of market declines and typically when you see it go up over 30% in a day you are seeing pure panic in the market. That happened in December one day and that is a day I circled on the above chart in which the DOW dumped hard and then came back a few days later.

So I just look at this recent decline in the market as a speed bump for now. In fact I think it more likely that we will see REAL price volatility as measured by such indicators as the 200-day Bollinger Bands on the market averages shrink in the first half of this year. I explained why in a video I did way back in November you can find here.

Market is gapping down on the open. I’d expect a reversal before the close, but I’m not looking to trade it. I have something else I’m starting to eye for a new position.