02|02|2021

Route or Rebellion? | January 29, 2021

Markets shed 3.35% last week. Is the route sustainable or is it more of an ill-fated rebellion?

Monday

Markets rose marginally on Monday. Economic data was light, contributing little to market moves. Filling the vacuum from the lack of data was the positive vaccination news. Also, aiding the rise was falling hospitalization numbers and falling new COVID cases.

Tuesday

There was not much movement on the S&P 500 on Tuesday. Home prices rose annually at 11% nationally for November. This move is nice, but a concern to the stress seen in the leasing markets for major metropolitan areas. Consumer confidence rose in January to 89.3, in an encouraging move.

Wednesday

Markets underwent a sell off on Wednesday. Most of which will get attributed to a Federal Reserve speech that was virtually unchanged from the last one. There was, however, an interesting phenomenon occurring in certain stocks that have carried considerable selling pressure in the past. A wave of buying attention caused system outages from retail brokerage firms. The squeeze this has put on hedge fund investors has likely caused part of the market sell off. More stable assets would have to be sold to meet margin calls. Interestingly, short interest has done nothing but increased as these stocks have rallied.

Thursday

There was a bounce in markets on Thursday. This came as some institutions curbed trading on certain equities from the rebellion trade on Wednesday. This was in an effort to protect the lay investors from feverish volatility in those positions. It also allows firms to catch up o the demand.

Friday

Markets resumed the sell off on Friday. Economic data was minimal. Consumer Sentiment fell to 79.0 from 79.2 and pending home sales fell 0.3% rather than falling 0.1%. This data was not enough alone to warrant the 2% sell off in the S&P 500. This came as trading in the likes of Game Stop resumed. Silver is another position that has benefited from the rebellion. There appears to be an attempt to get physically delivery to occur. In doing so, they would show the weakness in actual supply vs the trading against the commodity.

Conclusion

The move in Game Stop shares seemed to be blown into a bigger story than it should be. This is understandable given the historically small size of this retailer. The reality is market participation on either side of the trade make this much larger than the valuation of the company. It feels as though good money is having to pay the price of bad money. It is currently being presented as a route to hedge funds as they were predominantly carrying the short positions. It will take incredible staying power in order for it to stay this way. New short sale interest is high and if Game Stop were to return to prior values the new short trades would be more profitable than the original shorts were intended to be. It is still to be seen if the rebellion will result ultimately in a route or a boon for hedge funds.

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