Beauty behind the madness - GAMESTOP
Historical scenes have been witnessed this week. We don't ever look to seek pleasure in other's misfortune; however, seeing a hedge fund manager crying on TV was more than slightly enjoyable to watch. Hedge funds are the whales in the market. They push retail traders around and relentlessly punish the average trader whenever they wish. Revenge was seen this week, as the average Joe took a stand against these giant corporations that have exploited the little man for decades.
The pandemic has seen a large increase in retail traders for numerous reasons. Lockdowns increased the time individuals had on their hands, boosted savings. Stimulus put cash into people's pockets, and the rock bottom low interest rates on offer drove speculators into the stock market. Individual investors made up 19.5% of US equity trading volume in 2020, with the primary beneficiaries being giant tech stocks, including Facebook, Amazon, Apple, Netflix, and Alphabet, who all had record inflows.
January 2021 saw the market's most-hated stocks launch into their best month ever. GameStop (GME), a video-game retailer, saw its market cap explode to $25bn. To justify how ludicrous this is, at its lowest in 2020 GME's market cap was just $250m, as they posted enormous losses in both 2018/2019. This move had little to do with the fundamentals of the business or the actual value of the underlying company but was due to individual investors' creating a digital movement, seeking to prove a point. One Redditor, u/deepfu****gvalue, shared his trade and thesis on the forum, aware of the large number of GameStop shares being shorted, and the situation escalated from there.
As more individual investors piled in and bought shares in GME, this drove the price higher, subsequently forcing big hedge funds to buy more shares to cover their open short positions. This resulted in a historic short squeeze that saw a 1600%+ gain in less than 20 days, hedge funds taking on billions of dollars in losses, with some having to be bailed out.
While retail traders seem to be more focused on teaching a lesson to hedge funds and institutional capital, finding pleasure in the thought that they could topple wall street, this screams of a recipe for disaster. Many piled into the stock as a form of protest that they won't tolerate the 'markets are rigged against them'. As incredible as that is, it will only work for a limited time before the stock price crashes to what the businesses are actually worth.
Thursday, we saw a moment of extreme volatility where GME's stock trade between $112.25 and $483. This extreme volatility was shortly followed by financial platforms such as Robinhood suspending trading on multiple stocks across their platform, causing outrage. Once trading was restricted the price sharply fell from highs. Many individuals are seeking to take legal action against these firms as they feel it gave the hedge funds an unfair advantage. Redditors also turned their attention to other stocks with a large amount of institutional open shorts on, including AMC, Blackberry, and Nokia.
In terms of what happens next, it is almost guaranteed that due to the lack of fundamentals behind stocks such as GameStop, prices will eventually fall to lower levels. When this does happen, an enormous amount of individual traders who FOMO'd into the stock will incur considerable losses. The happenings will likely have long term effects as multiple vital questions will need to be addressed. This will potentially include heavier handed regulation and an investigation into finance platforms, like RobinHood, and their power over their users.
XAGUSD - A lesson in patience
One setup that has been on our radar for several months has been silver (XAGUSD). Silver originally had its wave one breakout in mid-December 2020. We patiently waited for the price to pull back to our confluence area. We have covered these developments in several TMC Hypes, countless Market Updates, and several Insights episodes.
Last week after the wave two pull back developed and decelerated at our confluences, the lower time frames' price action started to align with our higher time frame bias. This is what we look for before entering any position as a swing trader. Bullish momentum powered up, and we executed the position with one of our strategies, an SBO. Price flew into profit, and we closed out the week running +2.46% profit. As a swing trader (Jonny), I am looking to push this the entire next daily wave as all time frames align with a bullish bias. I am looking for a c40% increase up to c$34. Our day traders would've been targetting the recent daily highs and already banked their +3% profit and moved on.
Market open saw a large gap up as silver futures surged over the weekend, pushing silver above $30 for the first time since 2013. This was primarily due to speculators on Reddit binge purchasing physical bars and coins and a recorded $944 million net inflow into BlackRock Inc's iShares Silver Trust, the largest exchange-traded fund tracking the metal.
At the time of writing, the position is running +6.9% profit.
Are equity markets forming tops?
Equity markets have been pushing into new all-time highs for the last 11 weeks, continuing to move higher in their daily bullish channels. Many major sector indexes are also either at previous all-time highs or have printed a fresh one. We have regularly spoken on how overextended most of these indexes look and how a significant pullback is inevitable, resulting in printing a top.
Last week we saw the beginning of this development and the worst week US equities have seen since October 2020, putting the major US equities into a negative return for 2021. We also saw lead stocks struggling. This is likely due to the havoc retail traders brought to the markets last week and the implications this may bring in the future, and uncertainty over coronavirus vaccine rollout.
On the S&P500 we have broken down the ascending channel price has been respecting since early November 2021. We would like to see a break of the daily 50 EMA's and a retest before positioning ourselves short to play a correction.
'Life does not happen to you. It happens for you.'
If we want to talk about committing to the craft, George Lewer is the first that comes to mind. George resides in Perth, Australia, which means our live events are usually 4/5am for him. Most would use this as an excuse not to attend live, yet George consistently turns up every day. He brings enormous value to our club and even hosted an 'abundance challenge' for our members over the last 2 years to start January correct.
George has big plans this year and his journey so far makes for an epic read. Check out the full interview here.
What's happening this week?
Monday, February 1st, 2021 @ 1pm PT
Market Update with Jonny Godfrey
Wednesday, February 3rd, 2021 @ 1pm PT
Market Update with Irek Piekarski
Friday, February 5th, 2021 @ 9am PT
Insights with Jonny Godfrey
All the best for the week ahead and we'll see you in the club!
Jonny Godfrey & the TMC Team