WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

One of the craziest weeks explained…

Hedge Fund nearly bankrupt as day traders attack wall street

In case you have been wondering why you have been seeing Gamestop (GME) and AMC in the news a lot this week, it’s due to the fact that these two failing companies nearly took out one of Wall Street’s biggest hedge fund managers in a span of three days. That’s just part of the story that also includes Reddit Users, Twitter Wars,  Elon Musk, Chamath Palihapitiya, Memes, and what may ultimately be an ugly ending for stock holders, even if you weren’t involved. 

Full disclosure, I did not buy into the $GME craze. In these cases if you’re initiating this type of pump, or you’re not already in it, it’s too dangerous to just “hop on” – while there were a few millionaires, and reportedly one billionaire made this week, the truth is someone will be left holding the bag at the end, and it won’t be pretty. 

I was however in $BB, and $NOK BEFORE all this started. Both of those stocks got sucked into the frenzy. So I did benefit and sold yesterday.  I was in these stocks for my own separate reasons. When they spiked, I took my profits and will look for future entries when all this subsides.

How is started…

It’s not entirely clear to me exactly how this started, but apparently an intrepid Reddit user discovered that Melvin Capital had a huge short position on $GME. This was key, since hedge funds are not mandated to report their short positions. As this information became publicly available, a user named WallStreetBets on Reddit, started using his forum to let people know he was buying the stock, and buying it big. People followed. Both regular stock and call options were purchased in great size. This caused two types of squeezes, the short squeeze, which causes anyone who bet short to buy back their shares. It also called what’s known as a convexity squeeze. Money makers need to keep a certain amount of stock on hand as it rises. Since money makers (the middle men in the stock market) had to join in the buying, it caused an endless feedback loop.

Retail investors bought shares/calls –> shorts had to cover –> money makers had to buy shares to have on hand to remain “delta neutral” – a lot of this was knew lingo to me as I do not short stocks and I am not really well versed in that section of the market. Matthew Kratter has a good video explaining what happened below.

While all this was happening, Melvin Capital, was in real financial trouble. Two other hedge funds had to come in to save them by investing billions in Melvin. Those other hedge funds were Citadel, and Point72. Citadel also happens to be one of Robinhood’s biggest clients, if not the biggest. So when Robinhood banned these stocks from trading this morning, there was quite an uproar from the trading community.

If the point of this whole exercise was to bring the Wall Street establishment to its knees, WallStreetBets and his followers definitely succeeded. If the goal was to bring about some sort of systematic change, they may also succeed in the long run, but maybe not in their favor. It’s too soon to tell at this point. 

 

How it’s going…

This story is evolving quickly. As of writing this article $GME has fallen about 50%, $AMC, $BB, and $NOK also faded hard from yesterday’s highs. 

Brokers Get Involved

This morning Robinhood, a popular investing app with millenials, along with several other large brokerage houses either restricted the buying and/or selling of all these stocks, or they were down completely for a period of time, thus reducing the volume of buying and selling and in some cases only allowing people to sell. This was market manipulation at the highest level! 

The exact thing that the hedge funds were accusing WallStreetBets of doing, they did to the little guys today. A class action lawsuit was already filed against RH today. We’ll see how this goes. 

Billionaires Cry Foul

It’s not surprising that most of the billionaires that went on CNBC today or yesterday were there to demonize the retail investor.  Billionaire, Leon Cooperman, saying it was an “…attack on the wealthy”. The CEO of Nasdaq tweeting that maybe brokerages should stop trading all together to allow huge firms to reposition themselves and quote “stop the spread of profits outside of wall street.” In other words, you don’t want the little guy to make money at the expense of the big guy. EXCUSE ME?!

So when my stocks take a nose dive can I ask a brokerage to halt trading for a couple of weeks while I reposition myself?  They would laugh me off their customer service line. A hedge fund can short a stock %140 percent (meaning shorted more than the available amount of shares) and completely wreck a company, but when the little guys does it to them, they’re calling it a crime. 

 

What happens now…

Unfortunately, nothing in my opinion. What’s done it done. The few lucky ones that got rich…congrats. The few that will be left holding this stock all the way back down…my condolences. Hopefully you cut your losses as quickly as you can. The report is that the hedge funds have already rebought their short positions now that $GME will almost certainly return to normal levels.

One big issue that became clear to retail investors this week was how blatant the game is rigged against us. If companies can randomly stop trading in an asset (other than normal trading halts) and completely remove them from being available at the whim of hedge fund who come crying to them, then what are we doing here? It clearly isn’t the “free market” economy that so many of these billionaires want to champion. It’s a rigged economy in their favor.

Hedge funds will likely look at ways of preventing this from happening again. By one estimate hedge funds lost $90 billion dollars this week trying to cover their short positions. The effect of that was them having to sell their long positions and causing the markets to drop (see 1/27) – a lot of good deals this morning if you were hunting for entry points.

Moving forward and learning from this week’s events.

I have learned to sit back, relax, and watch these events like a reality TV show. Not participating, sticking to your plan, and not getting caught up in stories like these are your best bet to keep your money safe. Unless you were lucky like I was with $BB and $NOK to already be in those stocks when it happened, I would avoid these types of moves in the future.

If you are itching for that excitement, in which case I would avoid the stock market altogether if I were you, you could hop on with a small amount to scratch that itch. Just don’t invest more than you are willing to lose. Way too much risk for me.

 

Nasdaq CEO Tweet
Humorous meme
WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

Today’s Trading Day Recap: January 25, 2021

Crazy Volatile Day – Ends Green

$BB, $GOGO, $TSLA, more…

Today was one of the most volatile days I can remember since I have started trading, and I wasn’t even in $GME! Congrats to those winners, and my condolences to those holding the bag near $160…yikes! I think I have seen other days like today, but it was when I was trading much lower volume, and likely not in as many positions as I am in now. 

I woke up this morning, just like most weekday mornings, around 6am. After waking up, brushing teeth, and settling down I am usually at my computer by 6:15am and I start looking at my holdings in the pre-market as well as my watchlist, and other scans I have running. When the bell rings I watch any stocks that I was only meaning to hold overnight (if I have any), and sell as needed. Then I turn my attention to my swing trades and just monitor them along with my scanners. 

Today however, I woke up to my account up about $3,000 from the previous day! If that had held it would mark the highest single day increase for one account in my trading career. Pretty exciting stuff! Typically if I end the day up $300-500 I am happy, and it wasn’t too many months ago that a $100 day was amazing to me. So of course, I was excited. The market came roaring to life right out the gate. It seemed everything I was holding had gapped up. 

I decided to watch a little while, and then sell 1/4 to 1/2 positions on some stocks. However, the internet had other plans. Schwab Street Smart Edge seemed to be down…NO!!! I logged off, and logged back in. Nope. I quickly turned to Twitter where it seemed Schwab was not the only platform experiencing outages. Meryll Lynch, E-trade, and RH for a moment were having trouble as well. 

I tried the schwab website instead of Street Smart Edge (which is their trading tool I use) – but nope, website wasn’t allowing trades either. AAARGH!

By the time I was finally able to trade, the high of day for most of the stocks had passed. Bummer…and at one point I was only up $100 on the day. Double bummer! I decided to say “Kumbaya” (sp?) and let it go. I kept tabs the remainder of the day as stocks swung wildly. 

By early afternoon (PST) stocks had recovered and stablized. In the end I closed partial positions on $GOGO (25% gain), and partial position on $SOLO (20% gain). The only stock I was able to sell near HOD was $FUBO, but unfortunately it was my smallest position. A win is a win though. 

Through all the volatility I ended the day up $1500 in my IRA, and break even in my brokerage account. Not bad considering the swings. The realized gains from the sales today put me over $5000 in realized gains for the month. That’s a new milestone for me! I think my previous best month was about $2500 in realized gains. Overall I am up about $7500 on the month. 

Today was a rollercoaster ride for sure, made only bad by the fact that I couldn’t sell my positions when stocks were blasting off this morning.  I am still holding some mostly winners, and my few losing positions right now are only down a few percent, with potential for upside. So I am still sitting in a good spot. 

How as your day today?

 

Investing Q&A of the Day: Float

Investing Q&A of the Day: Float

The Beginner Trader

What is a stock’s “float”?

A stock’s float refers to the amount of outstanding shares that are available for trade (buy/sell). To determine the amount of outstanding shares a company has, you can do a quick search on Yahoo Finance. THIS LINK will take you the Yahoo Finance “Statistics” page for the Coca Cola Company, stock symbol $KO. If you scroll down to the “Share Statistics” you will find the float. I have highlighted for you in the image below. 

 

Highlighting where to find a stock's float.

The “floating” stock is calculated by subtracting closely-held shares (insiders, major shareholders, employees) and restricted stock that may arise from an IPO.

Why does float matter?

Depending on your trading strategy, you will want to narrow your searching by float. In my day trading strategy I look for companies with less than 30-50 million shares. While that sounds like a lot of shares, that would be considered a low float stock. You can see in the example above that $KO has almost 4 billion shares of float, which is very high.

In my day trading strategy I am looking for stocks that are moving quickly in one direction or another. A stock with less shares will be more volatile than a stock with lots of shares. This is simply due to the dynamic of supply and demand. If a low share, low cost stock has good news in the morning, lots of traders will pour into that stock, and since there isn’t as many outstanding shares, the price of the stock will fluctuate wildy in the first hour of the morning. Riding that volatility is where you can make (or lose) money in a short amount of time. 

If you’re looking at a stock as more of a long term investment, float may not matter as much in your calculations. You would be looking at other fundamentals like ROIC, PE Ratios, ROA, etc. 

To learn more about stocks and investing be sure to follow me on twitter @cchapeton.