Stocks (Gamestop) Can Stay Irrational Longer Than You Can Stay Solvent

The stock market looks to open bright red today, something we haven’t seen in a while. Are short-term traders prepared? No way. I am guessing that even a mild to modest single digit decline will have most of them under their desks, sucking their thumbs in the fetal position.

Look, the market has seen epic greed and euphoria since early November. However, the foundation of the market has been very solid until the past week. The theme over the past few days or so has been a good, old fashioned short squeeze, or raiding of stocks where big institutions have bet heavily against. Remember, short selling is the exact opposite of buying. One is playing for a stock to go lower as you sell something you don’t own and hope to buy it back at lower prices.

There is a decades-old strategy of buying stocks with huge amounts of short-sellers against. The theory being that eventually, short-sellers will have to close out those positions by buying the stock back. It has mixed results long-term. However, when the market, or in today’s case Reddit, targets a stock or two, the snowball can get going to the upside and create a squeeze for those betting against the stock.

Let’s look at Gamestop, GME, today’s stock in the news. More than 100% of the outstanding shares were short sold. That’s an insane amount. Supposedly smart investors know the company’s fundamentals are weak and getting worse.

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10 months ago, the stock was roughly $3. By year-end it had soared to $20 as you can see above. That is some move. But that’s not the real story. At some point this month, the stock became Dotcom’esque in its interest on message boards. I have no idea why or who. From $20, GME more than doubled in two days as you can see below.

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That’s where the fun really began and not ended as most would think. Reddit became the hottest stock forum in the land for people to chat and tout. Hedge fund names circulated with chatter about funds blowing up who have been short the stock. That caused more and more speculators to buy and some hedge funds to throw in the towel and buy back stock they short sold.

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