GameStop Mania From WSB Prompts Hedge Funds To Run For Cover

What's up? It's good morning from him and from me. It's Thursday, 28th of January. Let's get into it then. What's been going on in the market? As you can tell, WallStreetBets and the run for cover from hedge funds is the talking point of markets. Definitely the main culprit for the underperformance in US equities yesterday. We had losses ranging from 2% in the Dow to 2.8% in the Nasdaq. It was the biggest S&P 500 rout we've had in a couple of months dating back to October. Even in after hours, we continue to move a little bit lower, but that then following on from generally the earnings updates where we had Apple, Tesla, Facebook, all of which traded lower in aftermarket trade. Tesla, the worst of the bunch, down 5%. Apple down, uh, over 3%. But we're going to talk about those in a little bit more detail in a second. But look, in all honesty, look, let's talk about what's been going on in markets. And as far as this morning is concerned, um, it's all kind of a little bit picking up from where, where we left off yesterday. So equity index futures a little bit softer this morning. The dollar is a little bit firmer, so the major currency pairs are trading up for the time being. The Dixie up about 0.1%. Oil slight negative. T-notes broadly flat. Gold down $11 on the session. Yeah, the main thing I wanted to stress here at the open this morning was that when we're looking at the, the general decline in equity markets yesterday, the overall kind of sentiment that was pushing things Definitely it started to pick up when the US started to come in. And definitely this whole idea about the kind of WallStreetBets and this clash between David and Goliath on the short sellers is, is a US-generated story because we're talking about US equities here. So a lot of that move really started to get initiated after the close. We also break out of the kind of bottom end of the range that we're trading in the SPOOs. Over the last couple of sessions. But the point I wanted to make here is that, look, this move was nothing to do with the Fed. Absolutely nothing. The Fed did exactly what was expected. There was no surprises at all. So the move was very much more tied to this idea about not one specific headline as such that, um, that came out yesterday, but a covering of shorts in some of the stocks subject to this kind of new retail activism, if you like, which is forcing a lot of desks to cut their profitable longs elsewhere to cover their, their shorts. And a couple of notes I've made this morning and a few stats, but if you're wondering how does short selling work, uh, you know, what's this kind of gamma squeeze and what— how do market makers further fuel the bid in some of these small stocks, then check out the video that I did with Eddie uh, yesterday he did a really good kind of 10-minute explanation about how all of that works. I'm going to talk about it much more from, um, the impact it's had. So Goldman Sachs Hedge Fund Industry VIP ETF, which tracks hedge funds' most popular stocks, tumbled 4.3% yesterday. It was the worst day since September, and that comes after Monday saw the largest unwinding in equities by hedge funds since August of 2019. Interestingly then, one of the main things here is that the most shorted companies in the Russell 3000— so again, as we work our way down this kind of hierarchy of market cap stocks, the S&P 500 being the biggest, then we work it down the 2000, the 3000, so on— we get down to much smaller size companies. So the most shorted companies in the Russell 3000 have been the index's top performers this year so far. 59 companies in the Russell 3000 rose by more than 10% yesterday, even as the index in itself fell by around 3%. One of the things that we saw yesterday, it really goes to show just how much of a grip at the moment WallStreetBets this kind of online community hub on message board on Reddit has over the markets is that moderators of WallStreetBets briefly blocked non-subscribers from accessing their page last night, and, uh, that caused some of the most discussed stocks to just fall as much as a third before the page turned— returned to its previous status and all of those stock prices rebounded. So It's almost like the blind leading the blind slightly, and as soon as they talk about stock, it just moves, and when they don't, it then doesn't move and it reverses that initial spike. Now, the overall kind of summary here, the piecing this together of why is it happening, and also, you know, is this type of behavior going to continue today, for example? Well, let's talk about it from a why is it happening point of view. Then we'll look at the S&P chart and we'll have a look about whether or not this is going to be a persistent thing, or are we in for a bit of a rebound. So one of the main reasons why yesterday this move here does look fairly heavy— and I, and I know that at the time it definitely, um, did feel that way going through the, the early part of North American session— but a lot of this, as I've just described, is about hedge funds taking action to reduce their exposure through forced liquidations in certain positions. So one of the things here is that, well, once those liquidations have taken place and those positions have been, let's say, slimmed down, well then there's no more of that activity to take place at that point. And one of the other things at the moment I think is that, you know, given the, the targeted focus of WallStreetBets this kind of retail mob on some of these bigger short seller hedge funds, then they're just going to steer clear, I would imagine, would be the most prudent course of action until the dust settles. And then that in itself means that this, this continuous liquidation kind of move we saw yesterday is probably unlikely to be repeated, at least continuous or to the magnitude of what we saw yesterday. That's— I mean, that's not to say it can't happen again. What I'm saying is that it's not a move that has infinity in the markets where it's just going to go down and down and down and down, I would say. Now, why has this happened? Well, the kind of notation I made to myself was from reading a few articles. I think that this I think this situation is really interesting from almost a societal level of a reflection of what's going on in the world at the moment, because these self-entitled, as they would call it, degenerates on these online message boards— we had come at a time where the barrier to entry to stock trading has dropped substantially with low-cost transactional costs to be able to trade. This as well with the sharp growth in stock options trading, which is typically something that in the past has been more an area for professionals to trade rather than a retail trader, but does give optionality then literally for having very small kind of lottery ticket bets on on these type of stocks, looking for, like we've had, a 1,600% gain in a single stock price. But overall, it comes in the context of definitely a deeper-rooted issue, which is, I think, a disenchanted youth where there's difficulty in labor market conditions, particularly in a pandemic environment, but coming off of the kind of the gradual recovery through the financial crisis, which has caused quite an inflated gap of wealth between, you know, kind of baby boomer generation to now this Generation Z and millennial, the difficulties they're confronted with, with, you know, home ownership being so expensive and these sorts of things. So I think there's, there's a lot more that's going on as well in the context of you know, there's stimulus checks being handed out in the US, there's people who are not at work, there's people who are locked at home during the pandemic. So it's almost like all the ingredients have just come together to form this perfect cocktail that's created this type of movement at the moment. But underlying it, I think, is this real kind of activism mentality on the kind of against Main Street or Wall Street in this case, but it's just being played out in a different, different way. So yeah, it's interesting. Is it going to be long-lasting? I don't think so. I think it's just, it's just kind of come to this complete crescendo moment, which is, which was yesterday. I still think it's going to be a talking point for a little while, but I think the world will move on as far as the traditional assets that generally that we look at. So what else is there to actually be aware of that's in focus for markets today? Well, look, let's have a quick look at the S&P 500 because it has been moving lower obviously from, from yesterday's sell-off inspired by a lot of what we've just been describing. Technically speaking, the lows that we had here on the 15th of January, that has been a point of now the recovery resistance that, that's capped the upside during the Asia-Pacific session before we've drifted back lower. Now one thing to note is the actual movement over the Fed was pretty benign. The actual deeper movement here came after market, um, and perhaps a little bit more pronounced in the likes of the NASDAQ. And that's because we had, you know, when it comes to people like Apple, for example, the Apple numbers were pretty pretty spectacular from a corporate earnings perspective. Their EPS, $1.68 against $1.41. Revenues, $111.4 billion, obviously breaching $100 billion for the first time and over the expectations of $103 billion. I think their China-based revenues were up around 58%. The iPad, the iPhone, the Mac, the wearables, the services, they sort of smashed it basically. Um, but the thing to understand when it comes to corporate earnings season, and particularly a stock like Apple, which is almost like this kind of buy the rumor, sell the fact type of price activity— this is Apple's aftermarket share performance, it's down 3.3% effectively. But I think it's important again to look at the context, because if you actually look at Apple shares, then the aftermarket put them down around $137, which basically puts them up where they were on Monday. So the stock had been well bid all the way into the release, and they basically confirmed what the market believed was going to happen. I mean, it was very well telegraphed in the press that the revenue number, the overall performance given the iPhone 12, given the pandemic situation and the impact that has on wearables, home accessories, services division, we all knew it was going to be good. And so as I was kind of discussing on the Amplify livestream yesterday, the upside relief was going to be minimal at best, if anything profit-taking short term. Definitely Apple, I still think, has a long way to go to the upside. So I don't— I don't— this doesn't really spook me at all, this kind of pullback. I think it's just a function of the pre— pre-positioning we saw into the earnings. The other companies, I mean, Tesla was down about 5%. You know, some question marks over their kind of government credits reliance, the payout to Elon Musk for the way that his, his remuneration package is structured, because given the meteoric rise to share price. Then Facebook was down about 2%. I mean, when I look at this S&P as a— from a technical perspective, and I stick it on a, on a daily chart, which is this one here, I do think there is perhaps a little bit more room for, for downside. I've got marked up here these two rectangles that I've had on this chart for, for a while, and now that we're below that area— if I just make this a little bit bigger here— this kind of peak of activity that we had at the end of last year, we came back down to briefly test it here and find some support in the middle of January. And as you can see, we broke through that, closed below there yesterday. We've had a false move above there and we remain below that 37.42 here on the daily chart. So that does mean then, I think it does open up a bit of a prospect that a deeper move here, looking at this chart from a technical perspective, 52.50, you know, is it going to get there today? I don't, I don't think so, but I think it gives this, depending on where we close today, I think it gives this market room for perhaps even a further pullback. But then ultimately, I think the normal pattern then resumes where we get up and then we eventually start to move back up and we do head to all-time highs. So, um, as I said, I think, you know, once hedge funds have readjusted their positions, you know, covering their short bets on the back of this attack from the WallStreetBets, then that's not a long-lasting thing that's gonna, gonna be around forever. And once those positions are adjusted, they're adjusted. So ultimately then, it kind of lands at the feet of this guy, Jerome Powell. And you know, what did he say yesterday? Well, completely as expected, um, largely a reiteration of recent commentary— near-term uncertainty needed, um, to be navigated before a more constructive medium term. What he means by that is the constructive medium term is the idea that the vaccine will get rolled out in time into the second half of the year, and that will then support the ongoing economic recovery in the US and globally. The near term, we have to get to that point first, obviously. So that would suggest then that now is not the time to be talking about things like tapering or altering the parameters around their bond buying program. The Fed Chair Powell leaned back against that idea of a premature exit of their kind of accommodative monetary policy at this point, all as expected. So, um, all in all then, this in itself, away from that FOMC meeting, I do think is one of the reasons that will underpin, even with a pullback, the fact that equity markets will stay relatively elevated, if not back to all-time highs at some point in the future. Because again, it's going to be supported by the ongoing assistance both from a monetary but also from a fiscal perspective as well, of course, under Joe Biden. A few other talking points to get you up to speed on. The EU remains at loggerheads with AstraZeneca. The drugmaker refused to cave into demands to take its vaccine supplies from its UK factories to increase doses going to the bloc in mainland Europe. They are due to speak again today, so that tit-for-tat continues to go on. I don't think that headline in itself is something to be spooked about. I think now the market has already digested this idea that the initial numbers of supply of the vaccine in mainland Europe are going to be substantially lower than perhaps was thought just a couple of weeks ago. But that's baked into price now, I would say. I think this needs to be monitored. A real extreme fallout that causes some sort of protectionism reaction, retaliation, I would say, that disrupts then the global distribution of vaccines in general, obviously would have very disruptive for markets given that that would impede then the economic view about the medium term. So it does need monitoring, but I don't think this headline itself is much of a thing. The German Health Minister came out just a few minutes ago and said that they will experience at least another 10 weeks of a coronavirus vaccine shortage. So that's the kind of time frames that we're operating with at the moment. Moving as an extension on that, we've had UK Prime Minister Boris Johnson come out, and obviously the, the tone has changed already from a few weeks ago. But basically Johnson putting England on notice that the national lockdown will continue for at least another 6 weeks. Remember, the government was quite hopeful by mid-February, and even though the vaccine being administered has gone relatively successfully comparative to peers in the UK, it is slightly off target in terms of that pace. But all in all, just given the situation on the pressure on the infrastructure, on the NHS, and so on and so forth, I think this was very much expected. If anything, it wouldn't be surprising to see this even roll on further. So again, it's not a market mover, I would say, that's really a focal point for this morning. That then leads us on for what have we got today? Well, we've had a couple of the first German state CPIs come out already. Again, I don't think they're, they're going to be massive. The month-to-month Saxony figures already come out 0.5%, and that was the same as previous. I wouldn't be really looking for that to initiate real firm direction in European assets. The sentiment figures that here for the eurozone, for any new trader, these look quite interesting, you know, economic sentiment, industrial sentiment, service sentiment, but they very rarely move the market. So again, I wouldn't kind of be sitting on your hands if you should see an opportunity. I don't think you need to be particularly cautious around the timing of those numbers. The main kind of figure from a, from a schedule perspective is the Q4 advanced US GDP figure. Expected to obviously decelerate sharply from the huge bounce that we saw, uh, from previous studies, 3.4%, down to a 4% figure. We do have a wide range. Remember, this is the advanced figure, so it does carry the propensity to move markets the most out of the advanced, preliminary, and final readings. And the range then is much wider this time round because it's a kind of a modeled-generated expectation of what the GDP headline of 4% is from all these different banks and research houses. So the range is 0 to 6.8%. Even if it goes either way, I don't think it's a particularly big deal for the Fed. So beyond the intraday, I don't think it's too important. But from the intraday perspective, sure, a breach of either side could be interesting. How to take it? Well, I guess if we get a negative print, which is considerably weaker obviously than 4% growth and the lower bound of zero, you'd probably be thinking then, well, look, there's no way that the Fed are going to have any of this exit talk about their policy at the moment. So T-notes would probably be bid, the dollar would weaken. If anything, equities could be supported by this idea that there's no need to fret about the tightening of policy anytime soon. So that's how I kind of interpret that. But that's coming out 1:30, will be one of the main focal points of the session ahead. You've also got the core PCE figure, your initial jobless claims, all coming out at the same time. Jobless claims expected at 875,000 from the prior 900 we saw last week. New home sales then follows at 3:00, but I'd say the 1:30 group of data is much more important, um, as will too be the open on Wall Street to see whether or not then is there any more further unwinding of some of these short bets by these hedge funds. But one would think they've been pretty active already over the course of the last few days to try and run for cover. And so if that is the case, and then you get a GDP number which perhaps hits a bit of a sweet spot where it's not fantastically strong, it's kind of okay, moderate growth, let's say, which allows the Fed to remain fairly loose in its policy. And then the market starts to recover inevitably. Because from those earnings reports, like Tesla or Apple, I really don't think that really they were bad reports. It's just a function of just how their share price has been reacting ever since the last, last few months. Um, earnings for today, you've got probably McDonald's pre-market is one of the main ones to look out for. Visa, uh, the airline American Airlines, uh, Mastercard, few other names, but McDonald's probably, Visa, the larger cap ones to be aware of. And then you've got a 7-year note auction coming out for any US fixed income traders. All right, that is it. Gonna leave it at that. Um, any comments at all, feel free to just leave a comment. I'm happy to respond. Uh, if you're watching this on YouTube, remember to like and subscribe, really appreciate it. And remember to check out Eddie's video as well on the channel, definitely worth a watch on what's been happening with GameStop and explaining it. With much greater detail. Thanks very much, guys. Have a good day ahead.