The big news this week was supposed to be major earnings reports from companies such as Apple (AAPL) , Microsoft (MSFT) , Intel (INTC) and Facebook (FB) , but there was little coverage of these results as market players and the business media obsessed over wild short-squeezes in stocks with very poor fundamentals.
The market has been driven for a while by aggressive trading in various sectors like SPACs, EVs, cannabis, etc., but this week, money and attention rotated into shorting stocks including GameStop (GME) , Koss Corp. (KOSS) and Nokia (NOK) . There has been intense debate over whether the social media focus on squeezing these stocks, and it has turned into a "David versus Goliath" battle as small investors racked up gains while major hedge funds suffered billions in losses.
It has been an entertaining drama, but also a major distraction and caused quite a bit of disruption to the broader market. Rather than trade small-cap names, traders were gambling on short-squeezes, and hedge funds had to dump some good long positions to help fund the losses on short trades.
This all caused some of the worst selling since October and did significant technical damage to the major indices. Big-cap technology and FATMAAN names suffered the brunt of the damage, and it didn't help that there was a "sell the news" reaction to several good earnings reports.
In addition to the stress and emotions caused by these short-squeeze frenzies, there were also major problems with brokers. Some were overloaded due to the huge jump in speculative volume, and some, including Robinhood, restricted trading because of the huge liquidity issues they faced.
The good news is that while there was broad selling, many stocks did not suffer significant technical breakdowns. The corrective action in many small-cap names was orderly, and there didn't appear to be any real panic. Much of the pressure was due to hedge funds that had taken on too much leverage. They were stunned by the short-squeeze action and had to make painful sales to reduce exposure.
This short-squeeze frenzy is likely to continue, but it is also calming down, and I'm looking for some of the money that has been chasing it to rotate back into recent favorites. There are lots of earnings next week, and maybe this time the market will pay some attention to them.
Have a great weekend. I'll see you on Monday.