As Gravity Comes For Reddit Trades, Market’s Focus Shifts

The pain trade for stocks is probably higher. And by “stocks,” I mean real stocks.

For all the fanfare, last week’s tumult looks to have largely passed as the “stars” of the show were slammed back to reality. That, in turn, means the much ballyhooed long/short gross-down may be in the rearview.

It’s worth mentioning (and that’s an understatement) that all nefarious narratives aside, there’s usually a reason why beaten down stocks are beaten down.

“Short-interest, quite logically, [is] correlated with poor fundamentals and consequently, many of the companies targeted by this short squeeze also reside in the weakest balance sheet portfolio within the Russell 2000,” SocGen’s Andrew Lapthorne remarked, setting up the pair of visuals (below) which are quite remarkable.

Of course, as Lapthorne went on to say, shorting stocks with poor balance sheets is risky for a variety of reasons. They’re often illiquid and volatile. And besides, it’s expensive.

So, sure, “stuff happens” (omitting the expletive), but ultimately, Reddit cannot turn GameStop into Apple. GameStop is just GameStop.

It does make sense that investors would lean into laggards on an expected economic recovery — cyclicals and value being the logical beneficiaries, and such. But there’s obviously no fundamentals-based case for GameStop at $500 (or whatever). On the other side, there is a fundamentals-based case for many of the crowded longs that were collateral damage late last week as the chaos forced selling in the “VIPs.”

With reality (and gravity) now back in play, “short book performance [is] normalizing… tak[ing] the pressure off the HF ‘long-selling’ and/or dynamic hedging or short selling,” Nomura’s Charlie McElligott wrote Tuesday.

That, in turn, means the pressure from last week’s “escalation point” has eased materially.

“It’s just cleaner now,” McElligott added, noting that US equity futures experienced a greater than 5% high-to-low pullback, while speculative froth was… well, de-frothed.

Now, it’s back to focusing on what matters, which is the reflation narrative.

Note that in addition to the rather alarming price pressures showing up in PMIs stateside, last week’s upside surprise in German inflation is getting some attention. As noted in the chart header (below) there’s a ton of noise in the data right now, but the increase was a record.

You could argue (and some have) that these manifestations of upward price pressures are idiosyncratic and need to be contextualized. But, as McElligott wrote Tuesday, these “sneaky upside inflation surprises” matter, especially if they end up being a persistent and sustainable driver of global bond weakness and/or bear-steepening.

Throw in plodding progress (and I’m not sure “progress” is the right word, but it’ll have to do) on more US stimulus, and the market’s attention should turn again to the reflation story.

“A large unwind of the November gains seem unlikely, in our view,” Goldman said Monday afternoon. “While uncertainty remains high near term considering some of the positioning metrics such as Hedge fund leverage are still elevated, the recent market turmoil has not changed our constructive view on pro-cyclical assets for the rest of 2021.”

Finally, note that Treasurys attracted dip-buying on Tuesday morning. While a slow, steady rise in yields would ostensibly be positive to the extent it reflected an ongoing repricing (higher) of growth expectations, a bid for bonds on dips isn’t necessarily a bad thing. After all, the last thing we need is to careen from a “neon swan” short squeeze to a rates tantrum.


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One thought on “As Gravity Comes For Reddit Trades, Market’s Focus Shifts

  1. I suspect that r/wsb’s influence peaked last week and there will not be another GME. Too many voices have piled in to r/wsb, from opportunists trying to call the crowd over to their trade, hedge funds using aliases to steer or disrupt the narrative, celebrities, and trolls. The bulk of today’s 8 million members are late comers who are likely to have lost a dispiriting amount of money, or just spectators. The dealers, brokers, clearinghouses and regulators will be on alert for a repeat of systemic stress. The hedge funds will keep shorting, with better risk control.

    Retail investors will remain a significant factor, as long as markets are trending. There will be episodes of crazy action in micro cap stocks and brief r/wsb-driven blips in larger asset classes. Paying close attention to Reddit will be one way to make money; but investors who don’t want to spend their time down that rabbit hole will not need to.

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