07 February 2021
Source: Bloomberg & Momentum Global Investment Management
What this chart shows Last week we witnessed some incredible volatility in a small group of stocks targeted by retail investors gathering on social media platform Reddit. They targeted companies heavily shorted (meaning gains are realised when a share price falls) by hedge funds. By buying these shares in volume, prices increased, piling pressure on those who were short (as these positions were now generating big losses).
With share prices sky rocketing, many of those short investors were forced to buy the stock to cover their positions, pushing shares prices yet higher – known as a ‘short squeeze’. GameStop was one of those companies targeted and in this week’s chart we seek to reflect the impact made by these retail investors. The chart shows the daily traded value for GameStop compared with three of the largest US stocks – Tesla, Apple and Microsoft.
The blue columns indicate the average daily traded value (share price multiplied by volume of trade) from 31st January 2020 to 26th January 2021, whilst the red columns indicate the traded value on 27th January 2021. Clearly in normal times, as a much smaller company that is owned far less widely, GameStop’s traded value is much lower. However, the Reddit community’s mass effort to outwit large hedge funds resulted in this spike from an average daily traded value of $0.3bn to over $29bn.
Incredibly, the value of GameStop stock traded on 27th January exceeded that of the mega caps listed in this chart. To put these numbers into perspective, $29bn of GameStop stock equated to 121% of its market capitalisation on 27th January. In comparison, Tesla, Apple and Microsoft’s traded values on that day equated to 2.9%, 0.8% and 0.9% of their respective market caps. Why this chart is relevant This event has highlighted the influence that retail investors can have, particularly when they come together in force. It also reflects the power of social media in bringing these investors together. Going forwards, it will no doubt influence those investors capable of shorting as they are likely to take more notice of collective retail trading.
This story does beg the question what could happen if these investors turn their attention towards larger companies or other asset classes (we have seen them target silver in the past week which did see the price of the metal rally although it has since retreated).
Whilst we would argue at this stage these events pose little systemic risk to markets, it is certainly a story we continue to watch closely with interest. If this activity does continue it could well attract closer scrutiny from regulators with respect to collusion and market manipulation, but this remains unclear at present.
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