Retail traders that were usually treated as punching bag at Wall Street now became almost a deadly power for hedge funds, making a short squeeze chaos in the market.
WallStreetBets and SatoshiStreetBets Reddit groups’ four million followers are attacking shorts of institutional investors making them suffer. Some hedge funds have lost billions of dollars in a short squeeze massacre against the crowd. The brightest example were GameStop (GME), an ordinary gaming and game consoles offline store. Its shares skyrocketed by more than 1500% in two weeks making it a number one by share in U.S. Russel 3000 small cap index. Moreover, shares of Australian mining company GME Resources Ltd with the same ticker GME soared 60% with trading volume 2000% above three-month average.
From investment point of view GameStop is a clear outsider that was of nobody’s interest in pandemic turmoil. That is why hedge funds like Melvin Capital, Citron were in short position on these stocks. Fundamentally justified wise deal became a massacre of the Innocents as army of private traders from Reddit overthrew shorts of the institutional investors. Hedge funds were forced to initiate a sell-off in the broad stock market to cover their losses, making S&P 500 index to decline by 3.6% just in one day.
Many retail brokers have banned new trades in GME stocks forcing investors to close only their positions.
After this baseless forced sell-offs investors were buying out dips in some of the most “injured” stocks on Thursday. The S&P broad market index recovered some pf the losses rising above 3,800 points. Now it is not clear whether there is a real correction in the market or it is over now, and we could expect new highs.
Oil market is much less heated in this regard as Brent crude benchmark prices were bouncing from the resistance at $56 per barrel throughout this week, providing many sell opportunities. We may expect these opportunities to remain on Friday as well. However, it would be wise not to use this resistance anymore and wait for developments in Brent crude prices next week.
Gold prices are squeezed in the area of $1800-$1880 per troy ounce, waiting for a trigger to break out of this range. The base scenario for gold prices is to drop to $1650-1700 levels. But it is premature for this scenario to become a reality on Friday. So, we have to look at the next week developments in this regard.
The situation of the FX market is in correlation with the chaos on Wall Street this week. The Euro is gravitating to 1.21500 level vs the Greenback despite positive GDP data in the United States. We expect neutral price dynamic in this pair. The Cable is above 1.3700 with a high volatility within 1.36800-1.37600 range. So, traders may use opportunities to sell and buy close to this margins. The Japanese Yen is losing its strength against the Dollar by 0.8% this week and any levels close to 105.20 would be a great opportunity to open sell positions.