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Mish Schneider How investors could navigate the battle of Wall Street

The past week has seen utter chaos rain in equities, as individual investors have piled into certain stocks and destabilised the established order. Here, Michelle Schneider considers the phenomenon.

Out of the corner of my eye a message pops up on my screen saying “Hold the line! Selling here means Wall Street wins!”

This is one of thousands of posts found on big social media platforms, which spawned from a Reddit page known as Wall Street Bets. The page is an online forum that has exploded in popularity following their involvement in GameStop’s [GME] huge price movement.

 

 

In just the past three weeks, GameStop has risen from $19 to all-time highs of over $500 in afterhours trading.

Although the price now sits in the middle ground at about $300, the huge price increase left a path of destruction for anyone who had shorted GameStop.

Shorting shares takes the complete opposite position of buying a stock. When one shorts a stock, the profit is made off of the decline in price.

The recent debacle involves Melvin Capital, a large hedge fund.

They had a large short position in GameStop, so they were forced to cover much higher when the Reddit crew began to buy, thereby losing 30% of their capital.

The hedge fund was recently bailed out from the losses by Citadel Securities.

That created an uproar with retail investors and Wall Street Bets, who feel that while large institutional investors get bailout money, they continually get overlooked by regulators.

Even worse, these regulators threaten to take away the ability to trade in a free market.

Furthermore, Wall Street Bets members have stated the media has labelled them as the enemy since they were the direct cause of Melvin Capital’s loss.

“Old Wall Street & paid commentators whined all day about GameStop and dissed retail investors. The same folks that dissed and missed Tesla,” said Charles Payne, host of a popular Fox Business show.

 

"Old Wall Street & paid commentators whined all day about GameStop" - Charles Payne

 

Then on Thursday, popular brokerage platform Robinhood began to restrict the buying of GameStop and other popular stocks.

The major source of retail traders’ angst right now is that they are tired of the corruption on Wall Street propagated by large institutions and corporations.

Corporations have been able to borrow money at no interest, pay little or no taxes and, when they need a handout, get generous government bailouts.

The retail investor feels, in a word, screwed.

The social media posts and hype have turned into a battle with institutional investors on one side and Wall Street Bets plus retail traders on the other. Plus, it has become a celebrity cause, with many public figures weighing in.

Will short squeezing the big short positions of institutional traders become a new trend or a new bubble?

We say both. The new trend has begun with over six million followers currently on the Wall Street Bets feed. Plus — even with the restrictions by Reddit, Robinhood on buying GameStop etc — investors are finding ways around it and have even started a class action suit.

AOC finds the restrictions “unacceptable” and there are even rumours that Citadel Securities allowed short selling right before the ban on trading GameStop was announced. This is not done by any means. The social revolution now on everyone’s lips will only embolden the young traders who feel robbed of their rights, their money, feel cheated by boomers, hedge funds, bank bailouts, etc.

The bubble could emerge as per the lessons of the silver market in 1979-1981. Silver ran up from five to 50, or a 1000% move. The Hunt Brothers tried hard to corner the market. Eventually, the COMEX Board of Governors and the CFTC banned new buying and raised margins, causing the Hunt bros as well as many hedge funds to go belly up.

Stay tuned!

This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.

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