The story of the market since early November is the growing power of individual traders. Small-cap stocks have been ripping higher on great stock-picking and strong pockets of momentum.
Institutional Wall Street is not a fan of this sort of action. The cognoscenti consider these individual and small traders to be "dumb" money. They are viewed as undisciplined, overly emotional, and sure to suffer horrendous losses at some point in the future. It adds insult to injury that the stocks that the institutions favor are right now lagging the lowest-priced, small-cap names, many that lack real fundamentals.
The reality, though, is that the small-cap momentum action isn't just small individual traders. Aggressive hedge funds and bigger money are playing this game too. Opportunistic traders with substantial liquidity are driving the action, and there doesn't seem to be any signs that this is slowing.
The latest manifestation of the power of the small investor showed up in recent days when stocks with very high short interest were targeted by chat rooms that have become the home of many small investors. They have targeted the names that have the highest ratio of shorts. These names include GameStop (GME) , AMC Entertainment (AMC) , Bed, Bath & Beyond (BBBY) , and iRobot (IRBT) .
These stocks don't have fundamentals to justify their valuations, but that has nothing to do with the price action. This is a targeted squeeze, and the small money is powerful enough that it caused a large hedge fund to need an emergency bailout of $3.2 billion to cover short positions that had gone parabolic.
The bears have been telling us for a while that this aggressive small-cap trading is a contrary indicator. The pontificating "smart" money tells us over and over, "this will end badly." All bull markets eventually end badly, but the big issue is how long do they last? The fact that small money can overpower giant hedge funds and create massive, short squeezes is a good indication that there is still plenty of buying power out there. This money is going to continue to chase hot sectors and themes.
Don't let the indices mislead you. To navigate this market effectively, you have to understand where the "hot" money is going. It has been in SPACs, EVs, solar energy, bitcoin, and now it's in short squeezes.
Traders are pouring over the lists of names with high short interests right now and are looking for the next GME. Institutional Wall Street doesn't like this game and will do what it can to stop it, but when the small guys work together, they can overwhelm sizable hedge funds.
We have a mixed start, but the focus again is on stock-picking and not market timing.