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Could Entire Market Crash With Continued Short Squeeze?

short squeeze
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EDITOR NOTE: Bloomberg dismissed the Reddit-fueled GameStop event last week as an anomaly--traders cooped up amid the pandemic getting in on the surge. GameStop wasn’t the only stock that rose--there were plenty of others that didn’t receive media spotlight. The point is this: it wasn’t an anomaly. It was a targeted and well-coordinated swarm. The article below takes another angle; this one quite novel. Is it possible that your average “retail” crowd finally found a way to take advantage of the Federal Reserve’s liquidity, taking the advantage away from Wall Street, and turning such liquidity against the financial institutions who typically wield them, swarming their “short sale” positions? If so, the market just “evolved” or perhaps “mutated”--now becoming a much wider arena wherein even elite institutions may no longer be safe from the fringes of Main Street. In this new era of trading, markets are now subject to swarms. Welcome to the new era of “activist” trading.

Last Friday (Jan, 22) we advised readers who thought they had missed the move in GameStop GME (they hadn't), to position appropriately in the most shorted Russell 3000 names which included such tickers as FIZZDDSBBBYAMCXGOGO and a handful of other names, as it was likely that the short-squeeze was only just starting.

We were right and all of the stocks listed above - and others - exploded higher the coming Monday, and all other days of the week, with results - encapsulated by the WallStreetTips vs Wall Street feud - that has become the top conversation piece across America, while on WSB the only topic is the phenomenal gains generated by going long said most shorted stocks. To wit, the basket of top shorts we compiled on Jan 22 has tripled in the past week.

And while some are quick to blame last week's fireworks on the "dopamine rush" of traders at r/wallstreetbets who seek an outlet to being "copped up with little else to do during the pandemic" (as Bloomberg has done), the reality is that at the end of the day the strategy unleashed by the subreddit is merely an extension of the bubble dynamics that were made possible by the Federal Reserve (of which Bloomberg is also a very staunch fan) pumping trillions and trillions of shot-gunned liquidity into a financial system where there are now bubble visible anywhere one looks. In short, main street finally learned that it too can profit from the lunacy of the money printers at the Eccles building, and some are very unhappy about that (yes, it will end in tears, but - newsflash - $300 trillion in debt and $120BN in liquidity injections monthly will also end in tears).

That aside, one week later, Goldman has finally caught up with what Zero Hedge readers knew one week ago, and all the way down to a chart showing a basket of the most-shorted Russell 3000 stocks...

Goldman's David Kostin has published a post-mortem of what happened last week, writing that "the most heavily-shorted stocks have risen by 98% in the past three months, outstripping major short squeezes in 2000 and 2009."

He then points out something we discussed in "Hedge Funds Are Puking Longs To Cover Short-Squeeze Losses", noting that while aggregate short interest levels are remarkably low (imagine what would have happened has shorting been far more aggressive marketwide) "the -4% weekly return of our Hedge Fund VIP list of the most popular hedge fund long positions (GSTHHVIP) showed how excess in one small part of the market can create contagion."

Originally posted on TalkMarkets

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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