The following is an excerpt from Zacks Chief Strategist John Blank’s full Feb Market Strategy report To access the full PDF, . click here
Was the late January bout of U.S. stock weakness just ‘Sell-the-News’ trader action? Sure. That’s a worthy insight. Institutional traders were taking profits off the table, respecting very rich, fully priced in, stock market valuations. However, there was a lot of risk de-leveraging and capital building going on too. Due to the Reddit WallStreetBets social media stomp. Looking ahead, hedge fund Wall Street and this raging mass of retail stock traders are likely going to stay at war. Getting capital reserves built up is a way to endure that stress. And cover the losses. Even if your stocks are not in the crosshairs. I. Click the next two hotlinks Click on Reddit’s wallstreetbets trading room message board. Note it has now grown to hold 8.5 million members, on Feb. 4th. This number grew by 1 million over the last weekend of January (Jan. 30-31, 2021). According to their own facts page, “ /r/wallstreetbets is a community for making money and being amused while doing it. Or realistically, a place to come and upvote memes when your portfolio is down.” Click this second link to gain the stock market religion. This concerns a key slice of the broader Reddit chat narrative. 287K of these (3.7%) were Buying FDs when I first looked in. This number grew by just 1K over that Jan. 30-31 weekend. FD is a slang acronym. (Best to click the link to find out what those two words are!!). The hard-core options-buying part of the larger group call themselves this. II. This excerpt comes from that second hot link “FD’s is Wall Street Bets slang for out of the money options expiring within a week. “They are very high risk and have a high chance of failure. But the small chance of success can have tremendous upside. Basically, options give you the opportunity to buy 100 shares of a stock upon the expiration date. “However, you don’t need to wait until the expirations date to make money. You can actually buy and sell options based on the current price of it. The price of an option is determined by its intrinsic value plus its time premium. “Since FD’s are usually out of the money there’s no intrinsic value to worry about accounting for. “So, all of the price comes from time premium which in a weekly option should be close to zero. “Wall street betters are basically betting that the stock price will go above their strike price plus the cost of the premium before the expiration date. “If it does, they’ll make a ton of money since FD’s tend to be highly unlikely and if an option somehow does meet the strike price then that wall street better just won the stock market lottery and can hit the fabled 10 bagger (1000% gain).” Interesting, eh? III. Let’s dig into this Firstly, this looks to be a leverage-on-leverage war of conquest. This is the term for a military conflict where one state, nation, or people conquers or attempts to conquer another. According to the Wall Street Journal, the hedge fund shorter Melvin Capital lost -53% in January, hurt by GameStop ( and other bets. GME Quick Quote GME - Free Report) Citadel, its partners and Point72 took losses from their investment in the hedge fund. It started the year with about $12.5 billion and now runs ~$8 billion, including $2.75 billion in emergency funds. Via CNBC, we have learned that short-selling hedge funds suffered a mark-to-market loss of $19.75 billion YTD in the brick-and-mortar video game retailer GameStop, according to data they drew from S3 Partners. Still, the short sellers mostly are holding onto their bearish positions. Or they are being replaced by new hedge funds willing to bet against the stock. GME was trading at $300 a share in the Monday, Feb. 1st premarket. It was $92 in the Thursday, Feb. 4th premarket. I had $60 on my screen during the Feb. 4th trading day. Secondly, a separate, much nerdier, economist term to apply here is contagion (aka a rapid communication of an influence). Very likely, due to both the leverage and the contagion, knock-on effects from this Reddit discussion group are multiples larger than either the 7.8m or 288k numbers imply. Exhibit A— r/Wallstreetbets users have now bought GME billboards in New York City, San Diego, San Jose, Salt Lake City, Orlando, Dallas, Austin, Oklahoma City and Colorado Springs. The list continues to grow. Exhibit B— According to Goldman Sachs Prime Services, last week represented the largest active hedge fund de-grossing since February 2009. Funds in their coverage sold long positions and covered shorts in every sector. Thirdly, last week, Small Trader Call Buys to Open topped out at an almost unbelievable 87.3 million contracts, with a value of $44.4 billion in terms of premiums spent. 8 million is a typical number for these types of option contracts traded! Do this math appraisal. Divide $44.4 billion in call premiums by 288,000 FD buyers. That computes to $152,777 for each FD. That math doesn’t make sense, on the face of it. Some big institutional guys are in the mix. Or these FD guys are all in, with their life savings, on a few select trades. Or there are really multiples more of these FD guys. In sum, I think that “Buying FD” group did add to the downside stock market pressure. However, the S&P 500 index has a current market capitalization — of somewhere in the range of $31.6 trillion. That’s a big, big, big dog. Then add on the listed, liquid U.S. small-caps. Shorting is a bigger deal here. Then add the stock trading universe outside the USA. IV. In light of this diligence, my closing points a. Enjoy trading individual stocks, amidst any volatility. Render your attention to nuances, inside this r/WallStreetBets story. Make sure you log onto that site yourself. 20- and 30-somethings are in on it already. b. Cement this in. 50 billion connected devices worldwide could be in play now. Cisco says as many as 6.5 devices per person in 2020. This type of crowd action is likely a permanent feature of trading, much like it is to politics, fashion, and sport. c. Any screen-based numbers can hide the truth. I can provide one final, critical exhibit: On Feb. 4th, the “Buying FD” crowd had indeed miraculously grown to 414K. Happy Trading and Investing. Zacks February Sector/Industry/Company Telescope The Zacks Rank system showed 4 strong sectors, again, which is durably bullish. Info Tech was the top sectors this month; strong across most of its industries. Two internationally exposed sectors – Materials and Industrials – also came in at the top again. Think about Steel, Paper, Containers & Glass, Metals-Non-Ferrous and Machinery-Electrical, Construction-Building Services, and Metal Fabricating. Financials the fourth great sector, with Investment Banking & Brokering, Banks & Thrifts, and Major Banks coming in strong. Loan loss reserves declined. Health Care stayed at a Market Weight. Energy and Utilities were at the back. (1) Info Tech rose to Very, Very Attractive from Attractive. Computer-Office Equipment, Misc. Tech, the Semis, Computer Software Services, all of those look excellent. Top Zacks #1 Rank (STRONG BUY) STOCK: Apple ( stayed Very Attractive from Attractive. Steel, Paper, Chemicals, Containers & Glass and Metals-non-Ferrous remained very strong. AAPL Quick Quote AAPL - Free Report) (2) Materials Top Zacks #1 Rank (STRONG BUY) STOCK: ArcelorMittal ( MT Quick Quote MT - Free Report) (3) Industrials stayed Very Attractive. Machinery-Electrical, Construction-Building Services, Metal Fabricating, Pollution Control, and Machinery were the top industries. Top Zacks #1 Rank (STRONG BUY) STOCK: Emerson Electric ( EMR Quick Quote EMR - Free Report) (4) Financials stayed Very Attractive. Investment Banking, Banks & Thrifts and the Major Banks looked good. Higher rates help all of these. (5) Consumer Staples rose to Attractive from Market Weight. Food and Cons. Products Misc. Staples are the best. (6) Consumer Discretionary fell two notches to Market Weight from Very Attractive. Apparel, and Autos/Tires/Trucks, and Consumer Electronics were strong, and showed the Stay-at-Home buyer remains strong. (7) Health Care stayed at Market Weight. Medical Care is the best, likely a COVID effect. (8) Communications Services stayed at Market Weight. Telco Equipment was a very strong spot. (9) Utilities stayed Unattractive. Conclusion One has to conclude this too… The Fed and G10 money printing, which has produced a 10-yr U.S. Treasury rate of 1.15% on Feb. 4th, is assisting the r//WallStreetBets narrative. The more major governmental actors side solely with the bulls, the more the froth. The Fed has your backs — projecting a 0% Fed Funds rate — until the end of 2022. Stay safe and socially distant! John Blank 5 Stocks Set to Double Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth. Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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