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Hello, Bull Sheeters. As we’ve learned from meme-stonks trading, what goes up must also go down. Sip. Not only GameStop plummeting, but traders quickly roll out Monday’s silver rally.
Alas, stocks in Asia, Europe and US are higher ahead of today’s big profit calls Amazon and Alphabet’s Google.
In today’s essay, I dig deeper into how last week’s short squeeze went. It was really historic.
But first, let’s see what is moving the markets.
Market update
Asia
- The mainAsia Indexare higher in afternoon exchanges, with Hang Seng high 1.4%.
- Call it the snub heard around the world. China pays tribute to its best tech entrepreneurs. The list compiled by the state of the media is left Jack Ma.
- Australian mining giant Lynas scored a $ 30.4 million grant to build a rare earth metals processing plant in Texas, an effort to block China’s dominance in the vital commodities market.
Europe
- TheEuropean scholarshipswere winning out of the gates with theStoxx Europe 600 high 0.45% outdoors.
- Shares in BP were down 2.7% to the open after having signaled its first loss of a full year in a decade. “It was a tough quarter at the end of a really tough year,” BP CEO Bernard Looney told Bloomberg TV this morning.
- Should you invest in countries that lead the way for delivery COVID vaccine shots? Consider the UK pound sterling is on a roll, and now analysts think it could be one of the strongest currencies of 2021, helped by the country’s leader in the delivery of COVID jabs.
WE
- American Futures point to a positive opening. This was after the major indices rebounded on Monday from last week’s drop.
- Here’s some positive macro news: The Congressional Budget Office yesterday delivered an optimistic outlook, saying the American economy is expected to reach pre-pandemic levels by mid-year.
- Want more good news? The United States struck a Milestone yesterday with more vaccinations than COVID cases. That, and Moderna said he may be able to include more doses in each vaccine vial.
Somewhere else
- Gold slips after yesterday’s rally, swapping underneath $ 1850 / ounce.
- The dollar is off.
- Gross climbs with Brent trading above $ 57 / barrel.
- From 10 a.m. Rome time Bitcoin was almost up 2% at $ 34,400.
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A basket of shorts
GameStop is down nearly 30% in pre-trade this morning. This is after a 31.5% drop yesterday. More interesting for the Reddit brigade, short positions fell from nearly 140% of outstanding shares to around 50% yesterday, according to S3 Partners short-trackers.
Translation: GME is no longer the top-selling stock in the United States, suggesting that retail investors – what the guys on Wall Street called ‘dumb money’ – came out on top of all the small pressures.
Before anyone starts handing out cigars, let’s see what lessons can be learned from the binge eating of the past few days.
According to the Goldman Sachs equities team, last week’s squeeze was one for the record books. “The past 25 years have seen a number of abrupt pressures on the US stock market,” Goldman wrote in a recent investor note, “but none have been as extreme as recently.
Goldman goes on to expose something they spotted that, on the surface, seemed downright wacky. The 50 most shorted companies on the Russell 3000 (each with a decent market cap over $ 1 billion), have been on a tear recently. This basket of shorts has grown 98% over the past three months. (Okay, if you had any of these stocks in your portfolio during that time, you make deserves a cigar right now.)
Here is Goldman’s chart putting this latest short 3 month rally into historical perspective. Note the peak of + 98% on the right side.
What makes this rally so different is the outsized role retail traders play in driving up the prices of top-selling stocks. What is also remarkable: the pain they inflicted.
Last week’s rally in short stocks and the subsequent slump in other parts of the market “represented the biggest drop in active hedge funds since February 2009,” Goldman wrote, referring to one of the phases. the most brutal of the global financial crisis more than a decade ago. “The funds… have sold long positions and hedged shorts in all sectors.“
It certainly went like a bang.
If you’re wondering about the fuse, look no further than this long-known truth about the dangers of short selling. Over the years, “the rally for top-selling stocks has taken place against a backdrop of very low levels of overall short interest,” notes Goldman. “At the start of this year, the median S&P 500 share was at short interest equivalent to just 1.5% of market cap, matching mid-2000 as the lowest share in at least 25 years.
GameStop aside, short positions are really in the minority these days. This makes sense during a bull market. But whenever the long-to-shorts ratio gets out of balance, the conditions are ripe for epic cutbacks.
This is what savvy retail investors spotted when they decided to target GameStop. I’m not making any predictions on the GME stock price, but it will be more difficult to push the stock to the stars with so many shorts having hedged their positions and to exit the trade all together.
Still, if you are a supporter of GME, email me.
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Have a very good day everyone. I’ll see you here tomorrow… Until then, there’s more news below.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write tobullsheet@fortune.comor reply to this email with suggestions and comments.
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