As the market has rallied off the March low, there have been a series of rotations that have driven it higher. Themes such as "work at home," FATMAAN, SPACs, EVs, small-caps, value, bitcoin, high-beta technology and semiconductors have all led the market at various times while other groups have pulled back or consolidated. It has been a health rally, and it has been favoring small-cap stock-picking for a few months now.
In the last week, however, there were new rotations that have caused a great amount of consternation for many market participants. The new rotation is into heavily shorted stocks with very poor fundamentals. There has been an organized effort on social media to go after these names, and it has been amazingly successful for many of the small traders that have played this game.
Traditional Wall Street is in a tizzy over this action as the billionaire hedge fund managers that have used their tremendous financial power are suddenly on the wrong end of the action. There is some ridiculous outrage over the fact that people are buying stocks without regard to fundamentals or valuation, but the real problem is that traditional Wall Street is losing control of the market narrative and doesn't quite know what to do.
This story has been sucking up much of the oxygen in the market while the first real corrective action since October has finally occurred. Good earnings results from the likes of Microsoft (MSFT) , Apple (AAPL) and Facebook (FB) see negative reactions, and the ARK ETFs, which have been market leaders, are seeing their most significant pullbacks in months.
Despite this pressure on the indices and leading sectors and stocks, there still is a huge amount of liquidity out there looking for a place to go. For now, it has decided to flow into these short-squeeze plays that not only drive up the worst of the worst in the market but cause selling pressure on some of the best as funds need to raise capital to cover shorts. Hedge funds are cutting their market exposure by the fastest pace since 2014, according to Bloomberg.
The big question now is where does this rotation lead? The short-squeeze action is already so excessive that it is causing some substantial market disruption, and it simply isn't possible for it to not eventually collapse. We just don't know what the triggering event might be or how far things may run before they fall apart. GameStop (GME) is trading up close to $450 Thursday morning, which is a gain of 30% since last night's close. That is a 20-fold increase in a matter of a couple of weeks.
This short-squeeze action is extremely distracting, and it is causing market instability in a variety of ways. Eventually, it will resolve itself, and this massive liquidity will rotate back into other stocks and sectors, but right now, there is absolute chaos out there, and it is hurting the broader market.