The Latest Tell-Tale Sign of Market Euphoria
'WallStreetBets' is back in the spotlight... The latest tell-tale sign of market euphoria... A few decentralized 'short squeezes' for the ages... This is why the 'Melt Up' can be dangerous... Steve, Doc, and Austin go live in less than two hours...
We begin today with yet another example of the current market euphoria...
In brief, it looks like at least hundreds of greedy day traders – using online message-board site Reddit to communicate – have fueled a few epic "short squeezes" against Wall Street hedge funds that were betting against specific stocks.
For example, take a look at the price action of mostly forgotten video-game retailer GameStop (GME) or BlackBerry (BB), the maker of the once-ubiquitous handheld devices, over the past couple of weeks. It isn't hard to see what we mean, first with GameStop...
And then, with BlackBerry...
These stocks, and a handful of others, have experienced triple-digit gains in a short span for seemingly no reason. (BlackBerry even put out a statement yesterday saying as much.) No reason, that is, except for what's happening on the "WallStreetBets" section of Reddit's website...
This story involves a lot of angles that speak to Wall Street and Main Street euphoria and angst – and some entertainment value, too, for the wiser among us who know not to get directly involved. But the long and short of it is this...
WallStreetBets kicked off an online frenzy urging people to buy call options on certain left-for-dead stocks and "take it" to those folks on Wall Street who are short those stocks... And it caught on big time.
The result has been a few crowd-driven "short squeezes" that will be talked about for a long time in investing circles...
A short squeeze isn't a new concept, of course. It's when bearish investors, betting that the price of a particular asset will be lower in the future, are squeezed into running for the exits when prices instead go higher.
But the public and brash nature of these bets have gotten Wall Street's attention...
Our friend and Empire Financial Research founder Whitney Tilson had a great summary of the WallStreetBets situation up to this point in his free daily e-letter earlier today. Whitney even dug up what appears to be the starting point of this madness four months ago. And his colleague Berna Barshay had a similarly interesting take in her Empire Financial Daily e-letter last night.
We won't get into all the minutiae in today's Digest. Just know that WallStreetBets is a corner of the Internet populated by folks with reputations for looking to make quick, "easy" money...
We're not telling you to join them... not by a long shot. First off, if there was easy money to be made betting big on stocks like GameStop and BlackBerry, it already has been made. And more importantly, the bigger point for longer-term investors is this...
Whatever you hear about this story, know that it's another sign of the 'Melt Up' at work...
The "froth" in today's market – especially among retail investors, like those frequenting the WallStreetBets message board – is clear and present. And it's thanks to all of the central-bank and government-fueled reasons we've explained before...
We're talking, of course, about cheap dollars and nowhere else to make money with them. An army of day traders distorting the asset prices of a few companies higher by buying call options in large amounts is simply a manifestation of these themes...
We wonder what the Federal Reserve thinks.
Amid all the talk about WallStreetBets in the mainstream media today, we can't help but think back to late 2019. Our colleague Jeff Havenstein, an analyst on Dr. David "Doc" Eifrig's team, wrote about the community and its effects in the December 12, 2019 Digest, the last time stocks were shooting higher and higher with seemingly no end in sight...
If you've never heard of the online message board WallStreetBets, it's worth a visit...
The site, hosted on the popular news aggregator and discussion website Reddit, has become a home for investors who make risky bets, and want to share information and opinions about them.
The message board is a collection of investment tips, bragging, quite a few memes, and of course... overconfident young traders.
At the time, posters on this board were talking about an "infinite money cheat code" – a glitch in Robinhood's free stock-trading platform that allowed people to trade "on margin" to wild extremes of, say, 500 times leverage on a single stock.
A small group of traders noticed the loophole... and some of them made a lot of money with this "cheat code" – at least temporarily. They posted their returns online in the form of screenshots in the Robinhood app... Eventually, it got the attention of the U.S. Securities and Exchange Commission and became good fodder for Robinhood's critics.
But a lot of inexperienced traders who frequented WallStreetBets also lost a lot of money when share prices went the "wrong" way. This part of the story wasn't as widely reported, but Jeff wrote about that in his Digest, too...
One trader, who deposited $4,000 and had over $1.2 million of leverage, lost $22,000 – more than five times his initial deposit. We all go through the lesson (and pain) of having too much leverage at some point... but for these traders this lesson was excruciating.
Today, these WallStreetBets traders sound like they're trying to teach certain hedge funds a lesson...
And frankly, it seems like they've done it – at least to some degree.
No doubt, a handful of traders have made a lot of money by learning which stocks the hedge funds are short on... and pushing prices higher as a large enough group.
A few WallStreetBets users posted that they've turned tens of thousands of dollars into multimillions on just one options position... And on the other end of this trade, some institutional investors have lost large amounts of money.
For example, Melvin Capital Management is one of the largest hedge funds in the world. It was short GameStop before the WallStreetBets community unleashed its swarm... As a result, Melvin Capital reportedly suffered a 30% loss in the first 15 trading days of 2021, forcing it to essentially be bailed out yesterday by fellow asset-management firms Citadel and Point72 with a $2.75 billion investment.
The whole story has made for some lively discussion amongst a few of our editors over the past two days. As our Director of Research Austin Root put it in a private e-mail yesterday...
This is one of the craziest things I've seen. I remember back to the Porsche-Volkswagen short squeeze [in 2008] and all the folks that lost money there. This is probably worse for a bunch of small hedge funds.
As Berna over at Empire Financial Research wrote in her e-letter last night...
Banding together, the amateur traders beat the professional shorts on Wall Street. And not only did they make tons of money, they enjoyed a healthy dose of schadenfreude in watching the pain inflicted on professional investors. GME shares had been such a great short for so long, complacency had set in, and the pros were sucker-punched by the retail-driven short squeeze.
The pros that don't want this to happen again should reconsider what they're doing... and if there's a better way to do it. It also serves as a cautionary tale for individual investors like us... You want to have a trusted guide to follow whenever you're shorting companies.
It also raises the question, "Is this a fraudulent pump-and-dump scheme?"... Bloomberg columnist Matt Levine addressed this topic in great detail in his daily newsletter today.
Levine leans toward "no" for a few reasons... including, for example, that the calls to bet on GameStop were done in a public forum. So hedge funds could've seen them and adjusted their positions.
At the same time, it's always good to get both sides of a story...
If you read through the WallStreetBets message boards, you'll see one of the prime targets is Andrew Left of Citron Capital. He has been visibly and publicly short GameStop... which before this whole episode, we honestly thought may have already been out of business.
As it turns out, Left is Whitney's friend, and he gave his side of the story in an interview last night. Left started by saying that this story shows that "the market has come to its lowest form." More from Left, as published in Whitney's e-letter today...
The Reddit crowd apparently said, "Let's find a company that's completely dead – and because everyone knows that, there's a big short interest – and engineer a short squeeze."
There's not a five-year-old in the country who can kick my [butt]... but 1,000 of them probably could. That's what happened here.
The retail investor euphoria is obvious...
And it has been for months, as we noted back in September.
It seems we're not the only ones who think so. Here are Left's parting words to Whitney...
I've never been more bearish on the market than I am right now because of foolishness like this. The market today is a total get-rich-quick scheme. The lunatics are running the asylum.
I don't know how it ends, but it's not sustainable. The frenzy, the gang mentality, if you say anything negative, they go crazy on you, posting their trade tickets and bragging about their winnings... It's nutty.
While "nutty" is the word of the day, we do see an important difference in the market compared to a few months ago...
Back in September, we saw higher "fear" in the market – as measured by the popular CBOE Volatility Index ("VIX"), which gauges the bullish or bearish sentiment of traders.
This "fear gauge" is lower today... It checks in around 22. That's still higher than the VIX's three-decade average of roughly 17, but it's lower than it has been for most of the past 12 months. For contrarian investors, that means it's time to pay attention...
In Doc's Retirement Trader newsletter, he and his research team provide regular updates on the VIX. And here's what it looked like in last Friday's issue...
At the same time, Wall Street traders have been getting more bullish over the past few months. As our colleague Dr. Steve Sjuggerud wrote in his free DailyWealth e-letter on January 4...
According to Citigroup, overall euphoria is at its highest level since the early 2000s.
That's according to the company's Panic/Euphoria Composite Index, which looks at factors like margin debt and options trading. It shows dramatically higher euphoria than we ever saw during the 11-year bull market. And it's nearing 20-year highs, too.
Simply put, everyone's bullish. And they're behaving accordingly.
Professional investors are following suit. The Bank of America Merrill Lynch Global Fund Manager Survey from December shows it clearly...
It surveys a few hundred money managers to get their take on the markets each month. These professional money managers are now underweight cash for the first time since 2013.
This is why Steve and others on our team are becoming more cautious on U.S. stocks today...
We've mentioned this a few times in the Digest over the past two weeks alone... And you can add this WallStreetBets "takedown" of short-sellers as another example.
It's a tell-tale sign of a Melt Up.
As Steve wrote in his latest issue of True Wealth, published on Friday...
Twentysomethings are trading tech stocks on their phones. They're buying cryptocurrencies. They're speculating – in a way I haven't seen since, well, the last U.S. Melt Up in 1999.
Is it some fundamental change to our economy that's driving them to buy already-expensive stocks? No. It's far simpler than that.
Animal spirits have kicked in among investors. "FOMO" is here – fear of missing out. That's it.
This can be a dangerous yet entirely human emotion to get caught up in. And it's easy to get burned by succumbing to it... to get on and off the "good times" train at exactly the worst times...
As Steve says, today's market is dangerous for one simple reason. While times are good right now, we know what always happens next...
After a furious Melt Up, the market will endure a crushing "Melt Down."
So we can't say it enough...
Make sure you have a plan in place NOW for what you will do when the music stops... when WallStreetBets goes quiet again... and when the short squeezes no longer work.
We'll stop there today, but one more reminder before we go...
We're less than two hours away from our "2021 preview" event.
Steve, Doc, and Austin will share everything you need to know about how the markets will play out this year. And you don't want to miss it...
We expect to hear more thoughts on the Melt Up... insight about today's frothy market... Steve, Doc, and Austin's ideas on how you can best navigate these crazy times... and much more. Plus, just for tuning in, you'll get a free stock pick from each of them.
This event begins promptly at 8 p.m. Eastern time tonight. Click here right now to reserve your spot for free. You don't want to miss a second. Until tomorrow...
Michael Saylor: Bitcoin's Volatility Is Vitality
We wrote about MicroStrategy CEO Michael Saylor's headline-making bitcoin-buying moves earlier this month. And today, we're thrilled to share that our colleague Daniela Cambone recently caught up with Saylor for an exclusive interview...
During the discussion, they cover a lot of ground – including why Saylor thinks bitcoin is the best reserve asset for any company, insight on his exchanges with Tesla's Elon Musk, and how other CEOs might view bitcoin moving forward...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 1/25/21): ARK Fintech Innovation Fund (ARKF), Autohome (ATHM), Booz Allen Hamilton (BAH), ProShares Ultra Nasdaq Biotechnology Fund (BIB), CoreSite Realty (COR), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Futu Holdings (FUTU), iShares China Large-Cap Fund (FXI), Alphabet (GOOGL), Harrow Health (HROW), Harvest Health & Recreation (HRVSF), Renaissance IPO Fund (IPO), iShares U.S. Home Construction Fund (ITB), JD.com (JD), Jushi (JUSHF), KraneShares MSCI All China Health Care Index Fund (KURE), KraneShares CSI China Internet Fund (KWEB), Lennar (LEN), Lonza (LZAGY), MSA Safety (MSA), NetEase (NTES), NVR (NVR), OptimizeRx (OPRX), ResMed (RMD), ProShares Ultra Technology Fund (ROM), Silvergate Capital (SI), ProShares Ultra S&P 500 Fund (SSO), TFI International (TFII), Vanguard S&P 500 Fund (VOO), and ProShares Ultra FTSE China 50 Fund (XPP).
In today's mailbag, more feedback on Dan's Friday Digest. Do you have a comment or question? As always, send us an e-mail to feedback@stansberryresearch.com.
"Dan, VERY grateful for the philosopher-king viewpoint, and I think you're deadly accurate... just a matter of when!" – Paid-up subscriber Gary G.
"I am a civil engineer and a Stansberry subscriber and wanted to clarify a minor point. The definition of a '100-year' flood is not a flood that will occur every 100 years. It is a rain event that has a 1% chance of occurring every year. A '500-year' flood is a 0.2% chance every year.
"Keep up the good work." – Paid-up subscriber Dave D.
"RIGHT ON. I am scared to death the correction will be huge and take all my profits away. I will reinvest at the lower levels, but the loss really works on your mind. Greed is very powerful. Right now, I want to take some or a lot off the table, and make myself not try to stay a little longer to get 'a little more.'" – Paid-up subscriber Rick K.
"I think the Friday Digest was a good one. It is surely important for people to be reminded not to accept the generic 'norms' put forth by many writers and pundits. Several writers in the Stansberry camp have been sounding the warning to their readers over the past several weeks and I hope each of you keep it up.
"It is very easy to become brain dead to the potential of a big fall when all you see each day is the market moving up while ignoring the fact our money becomes more worthless each day.
"In 2008 Q3 I lost about 40% of my IRA because I didn't listen to the warnings, it won't happen again. At 73, I do not have any time left to recover. I keep a lot of cash, gold, and some stocks that I have been pairing back the size so I can't get hurt too badly when a sudden hit occurs.
"You're a good writer, keep up the good work." – Stansberry Alliance member Jim M.
All the best,
Corey McLaughlin
Naples, Florida
January 26, 2021