You wouldn’t think much happened in the markets if you looked at the averages on Monday’s close, because the DOW was only down like 30 points, while the Nasdaq closed barely in the green. Gold and mining stocks dipped into noon and then finished almost even on the close. My main brokerage account was down, but barely anything.
However, something big did happen in shares of Gamestop Corp. (NYSE: GME), because they soared 18%, while having gone up more than 5X in the space of just a few weeks, despite the fact that it is a deeply troubled company. You know what I mean if you have been in one of their stores lately, but if you are watching the stock you’d think something incredible happened and in a way it did.
What happened with Gamestop Corp (NYSE: GME) was a classic short squeeze. The stock has been one of the most heavily shorted stocks in the whole market and apparently a group of traders on Reddict all worked together to drive the stock higher.
According to Benzinga, “Despite the bearish fundamental trends in GameStop’s business, a large short squeeze has sent the stock soaring 360% in the past month to new all-time highs. One of the driving forces behind the squeeze appears to be online communities of high-risk speculative momentum traders, such as the Reddit community WallStreetBets.“
“There’s 1.9 million people in that WallStreetBets thread,” said Dennis Dick, who runs a Benzinga Podcast, “They all seem to be talking about GME. I’ve never seen that many people talking about the same stock….I don’t know when the party ends because obviously it’s been pushed by Reddit community.”
This is madness – the madness of crowds. There is mass speculation in the markets from the growth of Robinhood traders and the stimmy girl to SPAC plays, which remind me of my trading in internet spin-off in 1999.
How to turn your $600 stimmy into $13k. pic.twitter.com/p08SD29kyS
— TikTok Investors (@TikTokInvestors) January 4, 2021
But perhaps even crazier is the fact that there is now record margin debt in the market thanks to the biggest explosion in margin debt from individual traders ever. And it isn’t young people with small accounts doing that, because they don’t have the buying power to borrow enough to cause this to happen this big.
Extreme margin debt expansion has been a hallmark of speculative bubbles.
— Sven Henrich (@NorthmanTrader) January 24, 2021
There’s never been vertical margin debt growth to the extreme we see now. pic.twitter.com/aPRBR2F9CR
These factoids are markers of the moment we are in and tell us that there are risks in the market, but they don’t tell us when those risks will matter and right now there is no sign that they do. But we must keep our eyes wide open going forward.
So much trading happened in Gamestop that it turned over three times its trading float on Monday. Dave Skarica showed me a list of stocks with big short positions that have soared in recent weeks, so this looks like a trend traders are trying to play or create at the moment and even though my account finished down yesterday I had one small stock position up over 20%. I went and looked and 55% of its shares are shorted. It’s a REIT with empty mall and offices.
While the masses are wildly bullish to the point where they have created a mania, a lot of seasoned pros are worried about a coming crash. Yesterday I put up a post about Jeremy Grantham calling for one on Bloomberg. Personally, the way things stand now it is still my expectation that we’re going to see stock market volatility actually shrink in the first half of this year as I posited back in November. We saw record stock market volatility last year and that should lead to a return to the mean this year.
If you are new to trading grab my book Strategic Stock Trading.
-Mike
