Thursday, January 28, 2021
A version of this article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
A very partial recap of a bizarre day in financial markets.
It's hard to think of a more chaotic set of circumstances than what befell the stock market on Wednesday.
The day's main event was the continuing rally in highly-shorted stocks fueled by attention from Reddit — and by now, almost certainly accompanied by big money investors piling into the strangest trade in years.
Shares of GameStop (GME) gained 134% to close at $347.51. Last Wednesday, the stock closed at $39.12.
Shares of movie theater operator AMC (AMC) rose 301% on Wednesday to close at $19.90.
Shares of the company responsible for liquidating Blockbuster's operations — BB Liquidating Co. (BLIAQ) — doubled.
This is not an exhaustive list of the day's big winners.
As Deutsche Bank's Jim Reid said in a note early Wednesday, "The question I have is whether this [market dynamic is] a fascinating curiosity, or whether it’s indicative of a larger problem for global markets in 2021."
Wednesday yielded no firm answers. The SEC’s statement on the matter was of little help.
Some of those betting against GameStop did start to cut their losses.
Melvin Capital, the hedge fund which took on $2.75 billion in capital from Steve Cohen and Ken Griffin earlier this week, said it got out of its short bet on GameStop Tuesday afternoon.
"We have closed out our position in GME," a company spokesperson told Yahoo Finance. "The social media posts about Melvin Capital going bankrupt are categorically false."
And yes, we're at the point in the cycle when hedge funds have to squelch rumors they are going out of business.
Andrew Left of Citron Research also announced Wednesday morning he had covered a "majority" of his short on GameStop — for a loss of 100%.
Outside of these heavily-shorted names, however, the stock market came under considerable pressure on Wednesday. All three of the major averages fell more than 2%. The S&P 500 (^GSPC) and Dow (^DJI) are now in the red for the year.
The Reddit community has been focused on the short bets of Citron Research and Melvin Capital, but these are not the only firms selling short some of the popular names that investors have piled into on the long side. These shorts are called "popular" for a reason.
When a stock you are selling short starts to rise in price, you are forced to either cover the short, or post more collateral. Both require cash, often raised by selling stocks you own.
As a result, recent high flyers were among the big losers on Wednesday — Netflix (NFLX), Snap (SNAP), and Alphabet (GOOGL) all fell more than 5%. Chip stocks fared even worse, this despite AMD's (AMD) strong quarterly report Tuesday evening. The PHLX Semiconductor Index (^SOX) has more than doubled from the March 2020 market low; this index is now down about 7% in the past five days.
The Federal Reserve also announced its latest monetary policy decision on Wednesday, making no substantive changes to its statement. In a press conference on Wednesday afternoon, Fed Chair Jay Powell was “remarkably dovish” said Paul Ashworth, an economist at Capital Economics. Ashworth adds that Powell was “sanguine about the risks of rising inflation.”
But the day was not over with Powell's latest public statements.
Facebook and Apple both crushed expectations. Tesla reported better-than-expected sales on earnings that missed estimates. All three stocks were lower, but little changed, in after hours trading.
An injection of some relative calm in this week’s market — though there are still two days left to go.