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Market Arrested by Short-Squeeze Mania

Posted January 27, 2021
Patrick J. O’Hare

Shares of AMC Entertainment Holdings (AMC) are up 277% in pre-market trading and it’s not because the company is being acquired or a major studio said it is expediting its release schedule to bring a slate of blockbuster movies to AMC theaters this weekend. No, AMC is up 277% because it is the new chosen one of the short-squeeze mafia.

What about GameStop (GME), you ask? Eh, it is up only 70% from yesterday’s close to $247.00.

The moves in these stocks, and others, are the focal point, which is kind of the crazy point of the matter.

Microsoft (MSFT) had a blowout report. Advanced Micro Devices (AMD) did, too. Starbucks (SBUX) topped estimates but disappointed with its same-store sales. Boeing (BA) bombed with its quarterly results. 3M (MMM) was upgraded to Overweight from Neutral at JPMorgan Chase. Walgreens Boots Alliance (WBA) hired Rosalind Brewer, former COO of Starbucks, to be its CEO. Allstate (ALL) sold its life insurance unit to entities managed by Blackstone for $2.8 billion.

There is a lot of intriguing corporate news this morning, yet the trading action in the likes of AMC, which some thought only a few weeks ago could be at risk of a bankruptcy filing, is stealing the show. The only thing missing from its run this morning is a tweet of support or a claim from some bigwig investor that they have purchased an out-of-the-money call option with a strike price well above the pre-market indicated price.

It’s surreal, even for longtime investment professionals who will naturally go back in their mind to the crazy dot-com days when a stock would skyrocket just because the company added dot-com to its name.

This short squeeze action, though, is still something different. It’s likely to end the same, however, for these stocks when the mania breaks.

The rest of the market isn’t breaking this morning, but it is showing some cracks. The S&P futures are down 38 points and are trading 1.0% below fair value, the Nasdaq 100 futures are down 82 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 308 points and are trading 1.0% below fair value. The Russell 2000 futures are down 2.4%.

Ironically, the short-squeeze mania has something to do with this, as it is the type of mania longtime investment professionals know is often associated with a market that is overheated and in need of a rest/correction.

The weak disposition of the futures market is also striking because companies, like Microsoft and Advanced Micro Devices, delivered truly good fundamental news and yet there hasn’t been a rush to buy stocks following those reports. MSFT is up 1.7%, but it had been up more than 5% in the after-hours session following its report, and AMD is down 3.8% after being up around 4% in the after-hours session following its report.

Selling into strength also reflects a sense that certain stocks and/or the market have perhaps been carried too far, too fast.

This morning’s weakness is also remarkable because the FOMC is apt to release a policy directive at 2:00 p.m. ET today that reinforces an extraordinarily accommodative monetary policy stance. Fed Chair Powell, meanwhile, is apt to suggest at his press conference, which starts at 2:30 p.m. ET, that the Fed won’t be raising rates anytime soon.

He might be baited into talking about some of the speculative mania in the stock market, but his overarching message is apt to be that the broader market is not highly overpriced relative to bonds given the level of interest rates. 

This press conference will naturally command some added attention this afternoon, but so will the earnings reports from Apple (AAPL)Facebook (FB), and Tesla (TSLA), which are due after the close. Investors are clearly expecting good — nay, great — news from these companies.

Microsoft delivered on that expectation, but as one can see, it hasn’t moved the market, which appears fixated with a heightened degree of nervousness on the short-squeeze mania.

Originally Posted on January 27, 2021 – Market Arrested by Short-Squeeze Mania

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