European and US futures are trading lower as investors focus on one thing: how much damage is being done because of GameStop’s short squeeze. There is no doubt that fund managers had their biggest nightmare come true yesterday.
Hedge funds are running for liquidity to save themselves from a major disaster. They are selling their long positions sharply, creating a significant mess in the stock market. This is one of the prime reasons that we are also seeing the volatility index moving sharply higher as well.
We don’t yet know precisely the amount of damage that has been done as a result of GameStop’s short squeeze. If yesterday’s carnage represented the limit, then you could say that the current sell-off could be an opportunity. That is because we badly needed an excuse for stock markets to correct themselves. However, if there is still plenty of damage left to discover, and hedge funds still need to sell more to improve their cash positions, a likely scenario, then it means that we are going to see further sell-off in the equity markets.
The Federal Reserve’s statement released yesterday was a bit more dovish than the market expectated. The Fed acknowledged the fact that the economic situation has derailed further. Jerome Powell, the Fed Chairman, also said that it would take some time for the US economy to see substantial recovery. The message was clear: the Fed is in no mood to change its monetary policy anytime soon, and interest rates are going to stay at their current level for an extended period.
On the inflation front, we also had a similar tone as well, and this further stemmed from the argument that the Fed isn’t going to focus on the tapering date. All of this should have resulted in a lower dollar. However, this is not what we saw yesterday. The dollar gathered a lot of steam yesterday, and it rallied. The rally is on today as well.
The big question for investors and traders is why the dollar index is rallying when we know that the Fed isn’t going to increase the interest rate anytime soon. Well, the reason behind the current dollar index move wasn’t the Fed. It was the volatility in the stock market which was driven by GameStop stock. It is important to note that on the FOMC day, when everyone should be focusing on the Fed’s next move and reading the Fed message more closely, the focus was on GameStop’s share price. Every single headline was so much dominated with it that traders could not think of anything.
The message is big behind GameStop’s share price move: retail traders can now take on Wall Street. They are no longer afraid of hedge funds that used to crush retail traders with their mega trades. GameStop’s share price move has given retail traders a clear case study, and their confidence is so high now that every single stock which is highly shorted on Wall Street is in major demand now.
We see serious price moves, and there is a danger of another short squeeze happening. Stocks like AMC rallied over 300% yesterday. American Airlines, which isn’t even on the verge of bankruptcy, rallied substantially.
One important key take away from this is that we need to be more careful; retail traders command a lot of power, and finally, they can move the market. Wall Street needs to understand this message; otherwise, we are going to see several more episodes of this.