Market Commentary — February 1, 2021
So last week was the week of the “short squeeze”!
Despite a busy earnings week covering 37% of the S&P 500 stocks, it was some other names that got investor attention. Encouraged by message boards on Reddit and other online forums, retail investors have been collectively targeting stocks with high levels of short interest.
A short trade is a bearish position where an investor borrows shares and sells them, hoping to buy them back at a lower price in the future. In a “short squeeze,” a rising stock price can force short investors to buy back the shares at a higher price, incurring losses on their bearish positions as they “cover” their shorts. If enough bearish investors cover their short positions, they can drive the stock price to the moon.
GameStop, a video game retailer, and movie theater operator AMC Entertainment Holdings were two of the heavily shorted stocks that experienced short squeezes, causing huge price gains and major losses on short positions. The GameStop play was even the topic of a Saturday Night Live Cold Open this weekend entitled “What Still Works?” about the “stonk market”.
Many major hedge funds were among the short investors, and were forced to sell out of other stock positions to cover their losses. This helped spark a massive market sell-off on Wednesday, but another factor was generalized worry that all this is a sign that we are in a “bubble”. Stocks recovered a portion of their losses on Thursday after some online brokerages restricted buying in heavily shorted stocks.
These events have generated regulator interest and have lawmakers such as Ted Cruz and AOC demanding answers. That is not to say they are working together on this issue. “I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out. Happy to work w/ almost any other GOP that aren’t trying to get me killed. In the meantime if you want to help, you can resign,” she told Cruz in a tweet.
Once again, make sure you get your nominations in for 2020’s ETF.com Awards! Nominations close on February 28th.
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