The WallStreetBets Reddit forum shook markets last week by encouraging retail investors to buy certain stocks, causing huge losses for hedge funds that held short positions on them.
This article was originally published on Opto – Understand What Really Moves Markets.
It began with GameStop [GME] on 14 January, whose stock rose 27% during the day. Citron Research, one of the firms short-selling GameStop, called buyers of the stock “the suckers at this poker game”.
AMC Entertainment [AMC] was one of the most high-profile stocks affected in the saga. Its share price has declined steadily since 2017, when it lost 53.1% of its value in a single year. Between the end of 2017 and end of 2020, the stock shed a further 82.8%, trading at just over $2, down from $27 at the start of 2017. Despite being hammered by the coronavirus pandemic, the cinema chain was boosted by pressure from WallStreetBets on 27 January, when its stock nudged over the $20 mark.
Nokia’s [NOK] American depository shares have been impacted too, with the stock touching close to $10 per share during intraday trading on 27 January for the first time since December 2010. However, the stock quickly returned to its previous levels, closing the week of 29 January at $4.56, 8.6% above the previous week’s close. This volatility could worry management of the Finnish mobile phone firm, who may decide to quit US exchanges if the trend continues.
Nokia is held by several exchange-traded funds (ETFs), most notably the First Trust IndXX NextG ETF [NXTG]which follows an index tracking companies involved in 5G technology. On 1 February, Nokia made up 1.5% of the fund, although this has since decreased slightly.
The fund itself has been falling since 25 January, mirroring the performance of its two largest holdings, Lenovo Group [LNVGY] and LG Electronics [066570.KS].
Storming the Citadel?
While onlookers and retail traders have construed the events of the previous week as a populist uprising against the hedge funds that control the financial markets, the reality is more complex and less poetic.
According to Josh Barro, writer for Business Insider, the day traders following WallStreetBets have created a price bubble on the squeezed stocks. When it bursts, it will leave retail investors out of pocket to the tune of a predicted $20bn. Meanwhile, the bubble itself has created a perfect opportunity for other institutions to short-sell the stocks. Their gain will be the loss of the retail investors who came late to the party.
Citadel Securities, a hedge fund owned by billionaire Ken Griffin, saw huge gains in recent trading, acting as a market maker for retail investing platforms including Robinhood. The firm’s business practice, known as payment for order flow, where the fund pays brokerages for the right to trade against individual investor’s bets, is banned in many countries including the UK. It could soon be challenged by US lawmakers.
Similarly, the rise in AMC’s share price has lined the pockets of two major institutional investors, Silver Lake Group and Mudrick Capital Management. Both have swapped debt in the company for equity, which has since soared in value.
However, this can still be considered a symbolic victory for retail investors. While many of the WallStreetBets investors may indeed lose their shirts, they have caused “an authority crisis” for Wall Street institutions, Kevin Roose wrote in the New York Times. For instance, Citron Research has announced that, after two decades, it will stop publishing short-selling analysis.
Analysts, unsurprisingly, expect these bubbles to burst. Eight polled by CNN Money gave a narrow hold consensus rating for AMC. Four gave this rating and four rated it sell. Seven analysts offering 12-month price forecasts for AMC gave a high target of $5.50, 22.4% below AMC’s share price of $7.82 at close on 4 February. The lowest target of $1 would represent an 85.9% decrease in the value of the stock over the next year.
Nokia’s outlook is more positive, with a hold consensus among 31 analysts counterbalanced by 12 buy and two outperform ratings compared to two each of underperform and sell. Twenty-seven analysts offering 12-month price forecasts for Nokia yielded a median target of $4.59, 5.03% above the stock’s price as of 4 February’s close.
The Essential Stock Market Digest: Join 50,000+ Opto subscribers getting market-moving news direct to their inbox, 4 x a week.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.