Market Overview

29 January 2021

A Trading Flash Mob May Be Just the Tip of the Correction Iceberg

A handful of turbulent welters shuffled the deck of cards in a rather freakish style in both the United States and European markets over the past two days and nights. The populist flash mob of private, small traders' has originated or organised over online forums, such as Reddit, to force short-selling hedge funds to reverse their big short positions on a series of roadside stocks.

Companies like GameStop, a middle-sized video game retailer, whose motto is "power to the players", AMC Entertainment cinema and theatrical exhibition holding or Bed Bath & Beyond, a home furnishing network of shops and also a seller of bath items, kitchen textiles and interior design decisions, or Koss Corp, a manufacturer of stereo headphones and related accessory products, were not traded every day by the general market public. Their names were not widely known around the world, but a "Reddit rally" spurred a wild jump in the value of those shares by hundreds of percent in a couple of weeks. Hedge funds had to squeeze their long-term short positions, and many stop loss orders have been accomplished due to hedge funds' money management instructions, which even multiplied the pace of already extraordinary price movements.

Some part of the crowd, who snapped those shares up, managed to obtain a big profit, but many bought the assets at very expensive prices, and then the prices sharply went down after brokers set trading restrictions, so many flash mobbers are now unhappy as they are finding it difficult to get their money back while hedge funds are angry because of big losses. For example, Melvin Capital closed out its short position in GameStop after taking a huge loss, the hedge fund’s manager told CNBC. He could not confirm the amount of losses the firm took on the short position, but CNBC wrote at least two other funds have urgently infused close to $3 billion into Melvin Capital to shore up its finances.

Why is the market talking so much about this now? Because all those pyramid-type schemes at least have scared a part of other active funds in the market, giving them a signal about excessive risks and uncertainty. Unusual movements in a seemingly small segment of the market has brought a series of questions to the surface, like which companies could be targeted by new flash mobs? Thus, it did not affect local exotic groups of assets, but it did shake up some other parts of the investment portfolios of many large funds. Their overcautious decisions became the first trigger point for a mini sell-off at the U.S. market on Wednesday when the S&P500 broad market index dropped off a 3850 level to nearly the 3700 points area, where it was at Christmas time.

This decline was immediately mirrored by the fall of the European stock exchanges, which were suffering from lockdowns and have been slowly declining since almost the beginning of January. The French CAC 40 index actually fell almost to the lows of December. Then, before the end of Wall Street's session on Thursday, both European and U.S. stock markets recovered most of the previous day's losses. But today the S&P500 and the Dow Jones 30 futures are pointing to more possible trials to move down and adjust the prices of many assets before the funds consider asset prices totally acceptable for re-positioning.

It seems that the turmoil caused by a crowd of small traders is just the tip of the iceberg of investors' worries. The point is not just readiness of the brokerage community to lift restrictions on the purchase of hype shares today, which already led a pre-market GameStop price to 96% growth again. But the market is now worried that it has maybe run too far ahead in value on expectations of strong corporate reports, even for the capitalisation of such powerful companies as Apple, Facebook or Microsoft, for which the current volatility has increased significantly.

Following the best-ever report from Apple with $111.4 billion in revenue, including a 22% quarter increase in iPhone sales and a 24% increase in selling results for various services and apps, Apple shares failed to test the level of $144 per share on Thursday, which was reached a day before on expectations, and the price even declined yesterday to the $137 area. Microsoft fell from $242 on post-market trading on Tuesday as a reaction to the Q4 report, to below $230 per share at Wednesday's close. However, the report was really great, where earnings from Azure cloud service rose by 50% year-on-year, and all other indicators were seen to be excellent. Despite this, on the next day Microsoft shares touched the price zone above $242 again, but yesterday at the close they slipped again below $239.

Much more examples could be cited, but all of them indicate an increase in volatility and caution of the investment community in relation to price levels even for high-capitalisation and famous stocks. At the same time, the market is in no hurry to further sell off some shares that fell in price after weaker-than-expected reports, like Boeing, American Express and Starbucks, as they are probably keeping in mind some higher targets for the future. It looks like markets are going to face a tug-of war between common sense and the mental garbage in the coming days, and all this is again happening against a background of a continued misalignment between "too high" (or maybe not "too high"?) prices of some leading assets and a slow recovery of global economy due to delays in vaccinations and continued restrictions in many countries. Personal money management is seen to be one of the main keys to the reasonable profit/risks ratio in the current rather turbulent market.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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