They call us problem child
We spend our lives on trial
We walk an endless mile
We are the youth gone wild
We stand and we won't fall
We're one and one for all
The writing's on the wall
We are the youth gone wild
-- "Youth Gone Wild", Rachel Bolan, David "The Snake" Sabo (Skid Row) 1989
A Most Peculiar Day
How does one even describe the "price discovery" witnessed or perhaps experienced across several "interesting"stocks on Monday? OK, not just Monday, but recently, with Monday putting an exclamation point on that action. Is it over? Oh, I would not count on that.
Now that I have the eternal heavy metal classic "Youth Gone Wild", one of my all-time favorite songs by one of my all-time favorite bands, Skid Row, blasting in the back of your head, I want to throw you a curve and have you at least mentally use that tune (play it on YouTube if you have to) as a soundtrack for Walt Disney's (DIS) "Winnie The Pooh and The Blustery Day." There you go... perfect. Let's dig in.
Broadly speaking, equity markets turned on the jets with less than a half hour left in Monday's regular session, dressing up for the closing bell what had been mostly a negative day across the major indices. This late surge in "buy programs" took the Nasdaq Composite, which had outperformed all day, to a 0.7% increase for the session after having been down 1.3% earlier. The late demand also pushed the S&P 500 toward a 0.4% daily gain as well. This is where the day's action gets perplexing. Breadth was in one way, awful, yet in another way, very bullish.
Check this out.
Seven of the 11 S&P sector SPDR ETFs closed higher on the day. At the top of the performance tables you'll find the Utilities (XLU) , Staples (XLP) , and REITs (XLRE) , all defensive, and for the most part, interest-rate sensitive. Now scan down the four sector SPDRs that closed in the red: Energy (XLE) , Financials (XLF) , Industrials (XLI) , and Materials (XLB) . Hmm, all four of Monday's "losers" you would describe as cyclicals. That's not so encouraging. Investors seeking shelter at the expense of what will excel as an economic activity expands. This activity might be explained as President Biden's $1.9 trillion Covid relief package is starting to hit some opposition with the remaining fiscal hawks in Congress. At least this makes sense. The following does not.
At the NYSE, losers beat winners by almost 3 to 2. At the Nasdaq Market Site, losers also beat winners, albeit by a narrower margin. That said, advancing volume absolutely crushed declining volume at both of New York's primary equity exchanges, as aggregate volume increased quite significantly as well.
So was the day positive or negative? Depends how one looks at these things. I would say that across the Nasdaq Composite and Nasdaq 100 one may assume that Monday was a day of professional accumulation. For the Dow Utilities, there was no maybe about professionals sitting on the bid side. Beyond that though? The Dow Industrials, Dow Transports, S&P 400, S&P 500, S&P 600, and Russell 2000 all had one thing in common: None of them moved more than 0.36% in either direction.
By now, you have been inundated with stories about GameStop (GME) , AMC Entertainment (AMC) , BlackBerry (BB) , Bed Bath & Beyond (BBBY) , and even such names as Nokia (NOK) , Macy's (M) , and Designer Brands (DBI) . You have also heard about some of the trouble this has created in "hedge fund land." Reminds me of something I was told way back when I was a kid.
You see back in the day, I was sent to the U.S. Army Jungle Warfare School at Fort Sherman in Panama. The school was run by the U.S. Army Southern Command, and if you graduated you were awarded this really cool "Jungle Expert" certificate that had a couple of gnarly looking snakes illustrated on either side of your name and rank. The certificate didn't make you a "bad axx" but it did let you believe you were at that age.
I had not yet served in the Army when I was young. True. They used to send Marines through that school with army units. I went through with one of the old U.S. Army Pathfinder units back when they still existed. (Those guys were truly bad axx.) Well, this is a cool story but a long one, so I'll save it. The quote that crossed my mind came out of the mouth of an Army sergeant by the last name of Slaughter (not kidding). Sgt. Slaughter sat the Marines that would be going through the next class on some hot metal bleachers... and told us this... "Listen up Marines. You are not familiar with the bees down here. You piss off (his language) our bees, make sure you all run in different directions. This way they only kill one of you."
Never forgot Sgt. Slaughter. I was a corporal (squad leader) at the time, so it would be my job to get myself and 12 other guys in and out of that jungle in one piece. Turns out snakes, spiders, and big cats were more of a problem than the bees. The Howler Monkeys were hilarious.
It seems sudden, but it had to have happened over time, as young or if not young, new investors, figured out the system. My son, the one who trades, has been telling me for a while now, "Dad, you have to check out "Wall Street Bets" on Reddit, these guys are hilarious." I paid no mind for a bit. Then I started watching. Interesting to say the least. Howler Monkeys are funnier by the way.
What seems to be happening, is really quite simple when broken down systemically, but the fact that largely retail or day traders can form the ability to act as a swarm is truly incredible. As a trader who does take at times short positions in names that I think might be temporarily mispriced, I don't know whether to stand up and applaud this group for what they have managed to figure out, or to fear them for forcing me to consider them before getting myself exposed where before I may have considered the risk to be almost minimal.
To explain for those who don't quite understand, there seems to be a retail level focus on accumulating short-term out-of-the-money call options (that would have expired worthless) on the cheap in names with large aggregate short exposure. Readers may recall that in the past, I have written that I get real careful about shorting stocks once more than 8% of that stock's entire float is held in aggregate in short positions, and that I absolutely refuse to get short any name once that percentage climbs into double digits. Well, as of Dec. 31, there were just less than 68 million shares of GME held in short positions. As of Friday, this number was up to 72 million, or roughly 140% of GME's entire float. Squeeze does not begin to describe what we have seen.
Now, what happens when "the swarm" purchases large quantities of these short-term, out-of-the-money calls is that market makers who have sold those call options then have to purchase the equity in order to cap their risk. This forces the stock price higher, and then wakes up those short the same equity, who are then likely forced (unless they have the capital) to cover their short positions, thus exacerbating the upward momentum in the share price. That's the "short squeeze" and I don't think we have ever seen anything like this before.
I am sure that many of you have already read up on what went down on Monday in regards to Melvin Capital Management, a hedge fund that, according to the Wall Street Journal, had lost 30% year to date as of Friday. Melvin had $12.5 billion under management at year's end, so you do the math, and that number most likely got a little tougher to look at on Monday, as Melvin (according to the article) had a number of short positions on the book, including exposure to GME.
Well, the news late Monday was that Citadel LLC and its partners would invest $2 billion in Melvin, and that Point72 Asset Management (New York Mets owner Steve Cohen's firm), already $1 billion into Melvin, would invest another $750 million. It should be noted that Melvin Asset Management has been in recent years, a top-performing hedge fund, and that founder Gabe Plotkin had been a high level portfolio manager at Steve Cohen's SAC Capital Management (Point72's predecessor) prior to striking out on his own.
What I find incredible are two things that maybe show how naive I am or how out of touch with the modern environment I might be.
One, I am just amazed that "the swarm" figured this out and were able to act as a unit. Two, and this is mind boggling, I just can't believe that professional money managers would leave themselves this exposed on the short side. I hedge practically everything. Does that make me "old school" or "out of touch"? I guess it does. Maybe I won't hit a grand slam every other at bat (I definitely do not) and I hope this is not too arrogant sounding, but I expect to be able to pay my bills without having to call my friends.
Oh, does this mean the Mets are out on Trevor Bauer?
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 2.2% y/y.
09:00 - Case-Shiller HPI (Nov): Expecting 8.2% y/y, Last 7.9% y/y.
09:00 - FHFA HPI (Nov): Expecting 0.8% m/m, Last 1.5% m/m.
10:00 - Consumer Confidence (Jan): Expecting 88.8, Last 88.6.
10:00 - Richmond Fed Manufacturing Index (Jan): Expecting 16, Last 19.
16:30 - API Oil Inventories (Weekly): Last +2.562M.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Stephen "Sarge" Guilfoyle and Chris Versace and are co-portfolio managers of Stocks Under $10.