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WallStreetBets: The Big Short-Squeeze

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A Reddit message board called WallStreetBets (WSB) is legally 'manipulating' stocks in the market while being protected by the 1st Amendment (aka Freedom of Speech). The latest target of this Millennial & Gen Z driven trading blog has been GameStop (GME - Free Report) , which will go down in history as one of the biggest short-selling upsets ever.

GME is up over 600% in 9 trading days. Short sellers have lost more than $6 billion on a company whose market value was only $1.2 billion two weeks ago.

There were no other perceivable catalysts for this GME rally other than RC Venture's (a significant GME shareholder) and its co-founder & managing director Ryan Cohen's announcement of 3 new board members on January 11th. These new directors will join the rank of this dying brick-and-mortar retailer in an attempt to pull the company out of its obsolescent trajectory.

This small piece of bullish news was enough to start a domino effect of Reddit memes, massive gains screenshots, and FOMO buying. The 2+ million self-proclaimed degenerates on WallStreetBets drove GME 'to the moon' across 10s of thousands if not 100s of thousands of Robinhood trading accounts. The stock was trading at less than $20 a share on January 12th to its peak of $159.18 yesterday.

You can see GME’s prolific gains below and its RSI level (on the bottom) being above 95. A level of overbought that I have never seen in a large cap stock before.

GME was up 700% in less than two weeks (at its high), driven by one of the biggest short-squeeze in history catalyzed by a cohort of unified retail traders on WallStreetBets.  

The GME short-squeeze will be a case study in business schools for decades to come.

What Happened

The perfect storm of chaos caused GameStop's parabolic surge. GME had an unprecedented level of short interest, which equated to 139% of total shares held short (at its peak), meaning that there weren't even enough shares out there for everyone to cover these high-risk positions.

When WSB's degenerates started posting about GME when GameStop announced its 3 new board members: Ryan Cohen and two other digitally inclined directors, the WSB buying started. It didn't take long for some of the smaller, less capitalized investment firms to cover their shorts (buying the stock at market value to exit their positions) and add fuel to the rocket ship that was just taking off.

As more unqualified due diligence, memes, and screenshots of unbelievable gains hit the WSB message board, more and more degenerates piled into GME just hoping to catch some of the profit action. This caused another larger cascade of short-sellers from larger institutions to cover their short positions, which made the upside move of GME radically larger, catalyzing the Big Short-Squeeze.

The other big issue here is that the fundamentals and technicals of GameStop shares are so out of whack that GME bears continued to enter the trade through both short-selling and puts, which has led to what appears to be a continuous short-squeeze. Today the seemingly endless GME short-squeeze advances with the shares up as much as 90%.  

Now the question is whether WallStreetBets and its enormous degree of retail trading influence will target another highly shorted equity or if GME is a one-off. Will WallStreetBets mark the end of short-selling as we know it, or was GME a one-time sideshow in the market?

Is Short Selling Dead

The SEC is currently looking through the lawfulness of what happened with GME, but from where I am standing, it seems like this share price pump has been entirely legal. The degenerates on the WSB message board can provide their opinion about a stock no matter how weak their reasoning. This is actually precisely what short-selling Wall Street investment groups do.

They put on a short position in a stock, then come out with a release about what they are shorting and why they are shorting it, trusting that this will influence other investors and traders to follow suit.

WallStreetBets is fighting back with its 2+ million followers that can push stocks through hundreds of thousands of brokerage accounts. These WSB degenerates are bringing fresh money into the markets, and they are undoubtedly moving stocks. Some would call them gamblers, but I would call them opportunists with nothing to lose.

If WSB were to target other heavily shorted equities and trigger a short-squeeze of a similar magnitude as GME, this might cause short-sellers to rethink their strategy.

The most shorted stock in the market today is still GameStop as the battle between institutional shorts and retail traders' rages on. Ligand Pharmaceuticals (LGND - Free Report) and Bed Bath & Beyond (BBBY - Free Report) are the second and third most shorted stocks in the market, and WSB is already making a run at BBBY. The shares are up more than 18% today, driving over 75% returns in the past couple of weeks, despite multiple downgrades from investment firms following a disappointing earnings report.

Final Thoughts

I have learned from this new wave of traders and the crazy rally we have had since the COVID sell-off depths last March not to fight the momentum. It is better to ride the waves then try to time market reversals when there is so much uncertainty in these unprecedented market conditions.

Bubbles are being created in the market, and I would be careful with any large stock purchases at these frothy market levels.

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