3 Takeaways From the GME Army's Short Squeeze on Wall Street
"As the present now / Will later be past / The order is rapidly fadin'. / And the first one now will later be last / For the times they are a-changin'."
- Bob Dylan
A line's been drawn in the sand...
On one side stand the people of Main Street, led by a merry band of Reddit traders. On the other side stands the silk suit and martini lunch crowd known as Wall Street.
And Main Street just dealt Wall Street an epic blow this week.
GameStop Corp.'s (NYSE: GME) incredible melt-up in share value is nothing short of extraordinary. A better descriptor, however, is that it's a giant middle finger to the fat cats on Wall Street. This week's unprecedented action proves without a doubt that everyday investors like you and me can be a powerful force.
I truly admire the "for the people, by the people" effort behind this market action.
But the GME Reddit army may have unknowingly screwed the pooch for a lot of everyday folks long term by putting the squeeze on Wall Street's big-money players who are shorting a company already destined for insolvency.
Reddit's Band of Merry Traders Pull off Historic Squeeze
A short squeeze occurs when a stock jumps sharply higher in value, forcing traders previously shorting the stock to buy more shares in order to prevent greater losses.
The GME Reddit army executed the perfect short squeeze this week on GameStop. GME was one of the most heavily shorted stocks on the market. Recognizing this, savvy retail investors decided to take advantage of the opportunity. Through effective online messaging, the group was able to rally GME's share price past the inflection point that forced short sellers to start hedging.
Big institutions like Melvin Capital were stuck between a rock and a hard place, forced to sell assets or dip into cash reserves to cover their short positions, adding even more fuel to the fire. Shares of GME pushed higher and higher, further tightening the squeeze.
Fortunes were created in an instant. It's one hell of a story...
But not the whole story.
Unintended Consequences
While this insane action was going down, the greater market as represented by the S&P 500 (black line) was down roughly 1% over the same time frame.
Correlated to GME's massive push on Wednesday, the greater market endured a rough 3% sell-off that put the entire investing year at risk. The action in January is often a precursor for how the rest of the trading year plays out. The sell-off put us precariously close to booking a down month in January. Friday's close is crucially important.
You wouldn't think that a single stock story could cause a sell-off across the entire market, but that's exactly what happened. As GME's stock rose over 400%, the amount of money needed to cover these large short positions hit astronomical levels.
I firmly believe institutions and hedge fund managers were forced to sell positions in great stocks like Apple and Microsoft to cover their bets. Hence the flash 3% sell-off.
On top of that, the Chicago Board Options Exchange's (CBOE) Volatility Index - the market's fear gauge - jumped 10 points from Wednesday's close to Thursday's open. That typically doesn't bode well for stocks.
Which is why, even if you've never owned GameStop shares or options or used Reddit, this matters to you.
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The GME short squeeze not only caused numerous halts in intraday trading, but as of Thursday morning, Robinhood and TD Ameritrade announced they stopped processing buy orders on GME.
To be clear, the SEC did not stop trading on GME. The brokers made this call - at the behest of whom, we still don't know.
That's where things get really interesting - or maybe just downright illegal.
Because of this decision, institutions were given the chance to cover their short positions and the GME Reddit army was forced out of its positions, stopping the squeeze dead in its tracks.
And in a more nefarious turn, unconfirmed reports from Twitter users suggested they were not even allowed to sell their positions once GME shares started tanking.
Making matters even worse is the fact that global investment powerhouse Citadel - a known institutional short seller with direct ties to Melvin Capital that also just happens to own the controlling stake in Robinhood - had significant short interest in GameStop.
Citadel was on the hook for significant amounts of cash after GME's meteoric rise, ironically on the trading app it bankrolled.
And we haven't even unpacked the reports that Janet Yellen, a recipient of roughly $800,000 from Citadel for speaking fees, was supposedly on the phone all day Thursday with Wall Street executives.
As of this morning, we have more questions than answers.
The good news is the people may have won this one after all. Currently, GME is open for buying and trading back over $300 per share.
Certainly, the "times are a-changin'."
Which leads us to the real takeaways from this historic week of trading.
3 Important Takeaways From This Historic Week of Trading
1. As we have seen time in and time out - like with the Piggly Wiggly squeeze of 1923 - when Wall Street starts losing its own game, Wall Street will change the rules.
2. As noble as the Reddit army's efforts are, they may screw the entire trading year. As shorts cover, selling off other assets to do so, we may see more drawdown today, the final trading day of January. Historically, if stocks are down in the month of January, it turns into a down year. Friday's close is incredibly important now, thanks to the Reddit army's recklessness.
3. Despite all this, there are plenty of opportunities in the market that still offer life-changing gains. In fact, I just banked a sweet 60% gain in five days for select followers without the agita I'd get from trading GME.
The bottom line is my colleagues and I expect to bank a lot more awesome gains for readers this year no matter what headwinds we face, be they reckless retail investors or greedy Wall Street rule breakers.
And we won't put you in a position where you're caught with your pants down like so many late-moving GME traders yesterday. Learn more here.
Have a great weekend.
To your wealth, Sean McCloskeyEditor, Energy and Capital After spending 10 years in the consumer tech reporting and educational publishing industries, Sean has since redevoted himself to one of his original passions: identifying and cashing in on the most lucrative opportunities the market has to offer. As the former managing editor of multiple investment newsletters, he's covered virtually every sector of the market, ranging from energy and tech to gold and cannabis. Over the years, Sean has offered his followers the chance to score numerous triple-digit gains, and today he continues his mission to deliver followers the best chance to score big wins on Wall Street and beyond as an editor for Energy and Capital.
@TheRL_McCloskey on Twitter