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
12-1-20 Recap of $YALA

12-1-20 Recap of $YALA

Reversal Play

$YALA – 12-1-20

Found $YALA on my morning scanners and kept an eye on it for a potential reversal play. Worked out this time, and looking back at it, I played it perfectly. That rarely happens. Here is a quick overview of what I was looking for this morning and why it worked. 

Disclaimer: This is not investing advice. Due your own research and perfect your own strategies before entering any trades. This video is for educational purposes only. 

Chart Analysis: $PTON – Pitchfork Breakout

Chart Analysis: $PTON – Pitchfork Breakout

Watchlist Stocks

$PTON – 11/30/20

This stock had a great run up as one of the “stay at home” plays. Has pulled back recently but looks ready to make another run up. RSI divergence and breakout from pitchfork. Pitchforks are new for me and slightly subjective (as are many indicators) but let’s see if it works. I have my money tied up so I can’t enter, but this could be a good entry. Will track just to see if it works.

Potential Entry: $115
Initial Price Target: $130
Stop: $107

$PTON - RSI Diverging From Trend by CCInvesting on TradingView.com
Chart Analysis: $PTON – Pitchfork Breakout

Chart Analysis: $BA – Follow Up

Watchlist Stocks

$BA – 11/29/20

Following up on the post below from 12 days ago. The 50 day has now crossed the 200 day moving average. That will be a buy signal for many. Other things of note, bull pennant forming, and inside day candle on Friday. All could be pointing to a breakout here. My money is tied up elsewhere right now, and looking at other stocks. However, I may consider an add here in the near future. We’ll keep an eye on it. 

Potential Entry: $TBD
Price Target: $TBD

$BA - 50ma has crossed 200ma by CCInvesting on TradingView.com

Watchlist Stocks

$BA – 11/17/20

$BA has been strong lately on news that its 737 MAX will be taking to the skies again soon. Of course, with Covid ever looming, this stock still has some head wind. That being said, it did close above it’s 200MA again, and the 50MA isn’t far behind. If the 50 crosses the 200, I may be interested. Especially as the stock is getting close to that 232 pivot point. Just watching for now. 

Potential Entry: $TBD
Price Target: $TBD

$BA - Watchlist - Wait For 50MA by CCInvesting on TradingView.com

Chart Analysis: $PTON – Pitchfork Breakout

Chart Analysis: $AMD Weekly Chart

Watchlist Stocks

$AMD – 11/18/20

I have had a position in $AMD for a little while now. I have even bought, sold, and reopened a position in the past couple of months. My current cost basis (CB) is in the low $79 range. I am adding more today.

Potential Entry: When weekly breaks out of current Pennant. TBD, but around $85. I would feel okay getting in now though.
Price Target: $95-$100 in coming weeks.

$AMD - Consolidating on the weekly chart by CCInvesting on TradingView.com

Investing Q&A of the Day: Bull vs. Bears?

Investing Q&A of the Day: Bull vs. Bears?

The Beginner Trader

Bulls vs Bears

Even if you’ve never invested a penny in your life, you have likely heard the term “bullish” being used in regards to not only stocks, but any number of other subjects. For example, you may be bullish about your favorite team’s chances of winning a championship. Meaning, you think the chances are good. Being “bearish” mean the exact opposite. 

If you’ve never heard the term and are unclear about how it applies to the stock market, continue reading for a quick overview. 

Bull Market vs. Bear Market

One of the factors to take into consideration when looking for a trade is determine whether we are currently in a bull or bear market. Simply put, is the stock market going up, or going down. If the stock market is generally trending up for an extended period of time, we may be in a bull market. The exact opposite if true of a bear market.

This could be taken into account as a daily status, “are stocks generally  up, or down today?” to help you decide how much risk is involved in a particular trade. It’s true definition however would be if the stock market is trading above or below its 200 day moving average. 

You can look this up easily using your favorite charting software. If you don’t have charting software you like to use or have not used any before, you can use the free versions at www.StockCharts.com or www.Tradingview.com. 

Chart Bear Market

Bear Market Signal

In these images I will use a very recent, real world example. When Covid 19 began to wreak havoc on the economy we saw the stock market take a dive. Near the end of February 2020, the S&P 500 index closed below it’s 200 day moving average, the red line. This is a confirmation that the stock market is in decline. Further confirmed when the blue line (50 day moving average) also crossed below the 200ma. That is know as a “death cross” and people start to panic, and selling intensifies. You can see that play out in the larger red candle in mid-March. 

You will also hear folks on CNBC and twitter say that a bear market has begun when stocks fall 20% from recent highs. That can also be a signal to proceed with caution.

 

Chart - Bull Market

Bull Market Signal

Two months after the signal of the start of the bear market, we got the opposite signal. The first candle to reclaim the 200MA happened on April 18, 2020. It did slip slightly below it on the next day, but stocks continued to rise after that. The 50MA then crossed the 200MA in June, and stocks have generally continued in an uptrend since. 

Why does it matter to us?

If we are in a bear market that doesn’t mean we can’t buy stocks. In fact, just the opposite may be true. It may be a good time to find value stocks, or in the case of Covid, look for stocks that are likely to have a turn around once we find a vaccine. It does mean however, that we have to be cautious. Maybe be more patient, wait for opportunities, and try to scale in to a position rather than dump all your money into a stock at once. Bear markets can also be great for people that are comfortable with shorting stocks. Shorting stocks isn’t for everyone, or the faint of heart as they can be much more risky than just going long on a stock. That is a lesson for another day though. 

A saying you will hear a lot when it comes to investing will be “Bulls make money. Bears make money. Pigs get slaughtered.” Don’t be a pig. In other words, you can make money no matter which direction the stock market is going, but only if you know what you’re doing. Understanding the direction of the market is often the first step in entering a trade, but not the only one. 

Have anything to add to the discussion? Follow me on Twitter, @cchapeton, or find my Facebook page.