Story Much Deeper Than Widely Believed
There is much more to the story that widely believed.
Reddit traders were the catalyst for the squeeze idea, but that is all you can give them credit for.
Anatomy of a Short Squeeze
- Reddit traders on WallStreetBets discuss the GameStop idea. The incubation period lasts many months.
- The stock slowly rises and hedge funds pick up on the idea.
- Stubborn shorts keep at it and the stock is 140% shorted.
- More hedge funds pile in, this time with calls on the long side. They understand short squeezes.
- After they buy calls, the hedge funds placed huge market orders for more shares.
- The market makers who sold the calls have to buy shares to hedge the calls they sold.
- Steps 5 and 6 repeat until the shorts capitulate. This marks the absolute top.
- In the process of 5 and 6, the hedge funds who were long take gains.
- Some of those hedge funds in step 8 understand what’s next. They buy massive numbers of puts.
- The hedge funds who bought the PUTs then dump their longs in size.
- GameStop plunges.
- The hedge funds buy more puts and dump more stock with market orders, not limit orders.
- The option makers who sold the puts have to hedge. They hedge by shorting shares.
- There are no rules against market makers being naked short.
- Prices continue to collapse.
Not David vs Goliath
The Reddit traders and the mainstream media portray this as a David vs Goliath setup.
That is not at all what happened.
Reddit traders and individuals did not push two hedge funds to the brink. They were not big enough.
Hedge funds vs hedge fund is the real story behind the squeeze.
WallStreetBets and Reddit traders get credit for an idea and sticking with it, but they are not the driving force and they still do not understand what happened and why.
Stung by the Hate
Telling people to take profits was not the message the true believers wanted to hear.
Married to a Trade
Despite the obvious fact that the GameStop squeeze is not only over but in reverse (see points 9 to 15 above), denial runs deep.
The Short Squeeze is Over
On February 1, I asked GameStop Plunged 30% Today, Is the Short Squeeze Over?
My guess is the squeeze is over. Hedge funds have covered their shorts. And we have a three surge stage that frequently marks tops in short squeezes.
Gamestop was at $212 when I concluded the squeeze was over.
A number of people on Twitter informed me yesterday the squeeze is not over.
Well, the short squeeze in reverse was still not over.
Gamestop is now at $53.50. Anyone who bought north of $60 is sitting on huge losses.
Some of them will get the message. They will dump their shares. When enough do so it will mark the bottom.
I do not think we are there yet. And when it happens, don’t expect another huge squeeze out of it.
Mish
So I’ve read that the market is starting to look like the tech boom of 1999-2000. A big difference between now and then is interest rates. Anyone who wanted out of the market then could still produce an income, it is not that way today. Do folks here who see this as a top believe interest rates are going up enough to make folks want to sell? Since we’re long past a historic P/E ratio, what will drive folks to want out? Maybe mass bankruptcies or will the fed prevent that?
I agree Mish, I always thought that these “players” via Robinhood and other platforms were not that important. Although, RH did face serious liquidity issues that arise from fast growth, and higher vol. As you said a game was played on Wall Street and most of the big boys were the main event.
I am happy to see that M. Burry made north of $250 MM — as a well known value investor (pre-2007) he was a great stock picker going for the underlying values that a firm may hold.
I bet you he will buy back a stake when the price gets to the $5/7 range if he still believes his underlying theory.
It’s the same as the VW squeeze a few years back — a perfect storm where titans fought. And were some small investors made out like bandits.
I’m thinking the jobs report was lipstick painted on a pig….waiting to hear from Mish on that.
The dollar may have printed a swing high in its daily cycle….if so the metals might get some upside, but I think it will be brief and limited.
Stocks imho are now definitely showing signs of being in the late stage mania that precedes a top. I expect a correction sometime late this year. We’ll see how the Fed does in keeping the momo going.
I am now once again at full occupancy….no defaults, rents at all time highs. Houses that I bought five years ago are showing great ROI…better than I would have ever expected.
I think I’m heading to the lake.
That is exactly what I was thinking. After maybe being surprised for a little while by the strength of the up move, the Hedge Funds (who play seeing 20 moves ahead like pro chess players) setup a bull trap for the novice retail crowd (which seems to have fired off ALL their ammo in the first salvo) and then took a MUCH HIGHER profit from the collapse from the highs at much higher volumes than in the past few months when the price was hovering in the single and low double digits.
In fact the Reddit crowd seems to have taken a normal short trade and converted it into a giant, profitable short trade for the Hedge Funds.
Inadvertently, it will also put fear and doubt into the dumb retail crowd when the next call to action comes up and could be the way for the big funds to kill this kind of ramping up price.
Storm in a teacup and a valuable and perhaps costly lesson for many in the retail crowd.
Although price action was crazy, the shorty does not control the situation yet. people bought more than $50 is pretty high, but people shorted under 50$ are still under water. Today the price is touch 50 days mv. that means, lots of people under water if they traded gme in the past 2 months, both long and short! All longs have to do is patiently average down. sooner or later, the gme will shot up again.
I think it is going to be a good year for the stock market? COVID cases are falling sharply. Down 60% from a peak in December in my area. Local school district said all students will now go to school full time on March 1. Even the students that opted out to learn from home must return.
Restaurants are mostly back to pre-covid levels in my area. Many are mostly full again. Only 2 restaurants of the 35 in my 2 mile radius closed.
Travel and vacations will soon take off.
If the Dems hurry they can get another stimulus check out.
Stock market is still on fire. Wealth effect may help the economy this next year. I know of some people who are retiring early now with the gains in the stock market and housing.
Probably close to 500 billion to 1 trillion in student loans will be forgiven. That is a lot of disposable income that will hit the economy.
Minimum wages will increase.
Will this help the bottom 20% get ahead….no
But the Government will try to help them out in some way. Mitch Romney is proposing $4200 per child per year.
A $2 Trillion dollar infrastructure bill is being discussed.
The FED will keep interest rates low because of the huge government debt which will only grow bigger. rate increases will only hurt government sending so they will pressure the FED not to raise rates.
“The FED will keep interest rates low because of the huge government debt which will only grow bigger. rate increases will only hurt government sending so they will pressure the FED not to raise rates.”
Caveat there, Fed min wage hike imminent, in turn likely to spur inflation, Fed then likely to raise rates.
The stock market has already priced in a very good 2021. Can it go higher? Sure. Can it fall? Sure. If 2021 is only mediocre, it could fall, or if, as you suggest, inflation rears it’s head, it could fall.
Speaking of, eyes on charts of softs/commodities/metals and then T’s, yeah, it’ll be an interesting year.
(Duped, mean as response to Carl)
Speaking of, eyes on charts of softs/commodities/metals and then T’s, yeah, it’ll be an interesting year.
Why Do Senior Generals Live Like Billionaires? https://slate.com/news-and-politics/2012/11/petraeus-scandal-senior-generals-live-like-billionaires.html
When will the collapse end?
When Washington DC is reduced to Rome circa 900 AD.
I actually thought the stock market may have a little dip at the beginning of the week but off to new highs. I even thought some of those 100, 200, and 300 P/E stocks could see a dip. I was wrong. I have read many stories on stocktwits and people have made some serious money this past year. buying these momo stocks or cryptos. Stuff like buying $5k of a stock that it now worth $50k. Or $50k portfolios now worth over $500k.
Is it true. Who knows but many are as they screenshot their trades and balances on stocktwits. You can go back and read their old posts. I know someone who bought EXPI at $10 just 8 months ago and it is now $125. $9k is now $100k
I looked at buying puts in GME and AMC. They were very expensive.
When AMC hit 20, the $9 put was selling for $4. That means I would not make money unless AMC hit 5
Same with Gamestop Ithink a $100 put when GME hit $400 cost about $40 for the 2/5 strike. I did not think it could drop that fast. If I did buy I would only be up about $5 on risking $40.
I think perhaps the biggest blunder in this orgy of malinvestment is that GME management elected not to issue shares, at what would have been an incredibly cheap cost of capital.
They could have potentially raised billions, refocused the company, perhaps even acquired another company and put themselves back on the path as a going concern. What a missed opportunity to capitalize on a unique, if not bizarre event.
Let this be a lesson: Always, always, always have an offering on the shelf. You never know when it will come in handy
They would have done well to raise the cheap money, then offer to buy their brick and mortar locations (if they don’t own them) for a song and dance, then converted them to apartments (or Amazon hubs).
GME management probably would have had to call an Extraordinary General Assembly to get a vote authorizing a large share issue. That in itself would have caused the price to collapse. From a management point of view the logical action would be for management with stock options to cash out at the high price, resign and look for a new job or if sufficiently endowed (with stock) retire to a private island.
I love the commercial where they tell you divest yourself of gold, as it has no intrinsic value, and buy crypto. Which actually has no intrinsic value. Gold, silver, and copper are the three best conductors of electricity. Gold doesn’t tarnish or corrode, like the other two, but nobody wires their house with it. I wonder why?
When, over the weekend, Silver soared after “rumor” had it WSB was going to corner JPM silver shorts, I knew something was up.
Silver has a market cap of $1.4 trillion, there was absolutely NO way a group of millennials was moving that Silver, it had to be much, much bigger players.
A member here mentioned he was going to ride WSB’s Silver surge , I tried to warn him, I knew it was a spoof, and sure enough right at 9:30: a.m. Silver dropped – by Tuesday it was below Friday’s close,
I’d bet thousands of retail traders got into the morning premarket at the inflated price to ride the rumored WSB surge, and then got scalped.
Yesterday, I mentioned I finally was able to get into WSB’s discord channel, it became immediately obvious these guys are sitting ducks, just a few minutes of watching them chat made it obvious, they’re a hedge fund’s dream come true.
A place where “dumb” money convenes and openly discusses their next move, then to top it off, they proudly boast of their losses as if it’s a badge of honor replete with vulgar jokes and high school jabs.
Dumb money millennials begging to be fleeced…..with a full set of instructions.
They await the next round of Stimulus checks and they get their heads together to try and pick out another set of “suits” to go after. Money always returns to its righful owner. GME was no exception.
There was no WSB silver surge. That was a media fabrication
Silver has already had a stellar run in 2020……it needs to rest before the next leg. Gold looks better to me here…..but today’s green is just the dollar letting off steam….which I give 2-3 days into the DCL…then the headwinds probably resume.
I have decided to swing trade my position between the metals and a dollar index ETF like UUP to try to smooth out the bumps.
The dollar made a swing high, and I expect it to find a bottom very quickly…Monday or Tuesday probably…when the DXY makes a swing low I will sell SLV and GLD and hold UUP until the next dollar top, probably around March 1 or so.
Unless something changes in a big way, I think the metals will stall every time the dollar pumps….silver looks stretched…gold looks suppressed…I will probably go all in on gold on my next swing if the current G/S ratio keeps trending back up….. and silver doesn’t have a surprise breakout. I sure don’t look for one, based on technicals.
My outlook is for more dollar strength, probably for tat least he first two quarters…..so my swing trade is a defensive strategy to preserve capital…It the dollar streak breaks down for some reason, or the metals show unusual strength…..I will have to rethink.
Not sure this is how they do it on WSB….but it’s how I play this game, when I do play it.
Look at the volume on the chart. The HUGE(EST) volume was buys in the upper 30’s t 40’s. You have to get them underwater to REALLY get panic. Wait until the bulk of the longs start to go under. THEN WE GET PANIC!!
Excellent explanation, Mish. You said there was a movie coming, and I asked who the hero would be. It couldn’t be the shorts, and it couldn’t be the market makers, and it couldn’t be the Reddit people. Now we have the real “winners”, the hedge funds the cleaned out both the shorts and the longs. Will they be the heros? Or just another one of the many villains in this story.
I dunno about “hero” in this story, more a cautionary tale of zealous, naïve fools vs systemic corruption….mind, 140% short float isn’t supposed to be possible, and openly announcing a strategy like this shouldn’t actually have worked to begin with.
I agree that there is no here to this tale, but I think the moral of the story is clear enough. Bears make money sometimes, and Bulls make money sometimes, but pigs always get slaughtered.
As far as the strategy, openly announcing it could work anyway, in theory, but, only if they managed to buy >100% of the stock, and had a tight enough group to hold it.
“As far as the strategy, openly announcing it could work anyway, in theory, but, only if they managed to buy >100% of the stock, and had a tight enough group to hold it.”
“It could happen” – Judy Tenuta
Wall Street would probably change the rules if it did happen. My guess is that they would allow Gamestop to issue additional shares, providing them funding, but also breaking the corner on the market.
You have to congratulate the long term holders who happened to notice the rise, and who took the opportunity to escape.
A story with no hero.
A story for our times.
Very cogent analysis of the likely events.Explains it way better than the prevailing narrative.
In other news, I’m still down $66.50 from the silver short squeeze, but I made over a dollar today on gold. I’m on my way back, but the charts on gold and silver look pretty crappy……It’s gonna be a hard slog back to even money.
Maybe I should buy some deep-in-the-money puts to hedge my Big Long.
“Maybe I should buy some deep-in-the-money puts to hedge my Big Long.”
You gave me a chuckle, I assume that was the intent.
My entire trade is for chuckles. I will spend more for drinks and dinner tonight than I ever had at risk.
I’ve been trading and investing for a long time. I have nothing to prove. I’m just having fun, and believe me, I’m currently doing just fine.
The silver trade was an excuse for me to do a deep dive into the metals, which I’ve been doing this week. I used to follow gold and silver closely, but not as of late.
My conclusion is that the metals will likely stall out until the stock mania takes a smackdown….or the dollar turns back down…or both. But gold and silver are both in bull markets….and I expect to be made whole within a fairly short time, especially if gold finds a bottom.
My guess is we are going to be seeing more and more of these vertical ups-and-downs all around the “markets.” The it’s-all-just-a-f-ing-casino mania is ON (thanks Fed!) and everyone wants to catch the next pop. And it’s a fractal: entire markets will do this too … such as that V crash-bounce last March. Each V, whether it points up or down, is shocking now … but they’re becoming more common. I suspect we’ve only seen the start of a series of gut-wrenching V’s in the S&P500 — that almost no traders will be able to play correctly.
The wheels are seriously wobbling now because Washington has been trying to disconnect the USD from the real economy for a long time. They are getting really good (and cynical) about it now. They’ll do things going forward that were unthinkable in 2005.
Who wants to bet how long before they go NIRP despite the FOMC sincerely believing they can (and must!) hold 0%? I think it’s one or two more market shocks at most.
In reality, per an actual annual inflation rate of about 10%, negative interest rates would probably not make a ripple in this market. Bring it on, dudes!
Hilarious.
Completely predictable – but also hilarious.
The government should make whole, whomever lost money on the trade. This would boost confidence in the stock market, and those who run it.
Hedge Funds went long too. It’s not that simple that Reddit was long and Hedge Funds short.