Industry veterans put short-squeeze bedlam in perspective

As day traders and various algorithms are forced to take profits on some of the most overvalued irrelevant companies in recent memory, industry veterans are rocking back almost as if to say, “I told you so.”

The theatrics have spread to at least a dozen stocks, exemplified by the unprofitable retail gaming business GameStop Corp., which saw its stock price spike 8,000% over six months only to pull back sharply Thursday morning after spiking in spectacular fashion the previous day, driven by an epic short squeeze fueled by social media.

“Long term, this will be a blip just like all the other countless of examples of this kind of thing throughout history,” said Ben Johnson, global director of ETF research at Morningstar.

“It provides tremendous theater while we’re living through it, but over longer periods the markets heal and securities anchor themselves on long-term earning and fundamentals,” he added.

The so-called short squeeze, which drives up share prices by forcing investors betting on a stock to go down to buy more of it to hedge potential losses, is not new to the 2020s -- but it is easier to execute.

Marc Wyatt, head of global trading at T. Rowe Price, cited a “confluence of factors,” including market liquidity, stimulus checks, working from home and zero trading commissions that have “combine with social media platforms giving investors the right and ability to share their thoughts.”

Wyatt, like Johnson and most anyone else who has been through a few market cycles, is relatively nonplussed by the actions that have halted trading and stalled brokerage platforms during several days of rambunctious trading activity for some stocks.

“It will certainly have ripple effects because nothing in finance happens in a vacuum,” Wyatt said. “We will see variations on this [short squeeze] theme, but it will all depend on how this chapter gets closed.”

Jim McDonald, chief investment strategist at Northern Trust, said while the implications of the kind of short-squeeze efforts exercised over the past week shouldn’t have any significant impact on mutual funds or long term investors, it might alter the way institutional investors, including hedge funds, apply short positions going forward.

“The shift toward zero-commission trading, to some extent is a good thing, but it does facilitate the kind of speculation we’re seeing and the short squeeze highlights the risk of speculation,” he said. “I suspect people who have very large visible short positions are now looking at them differently after what happened over the past week.”

McDonald added that short-sellers could evolve with the times and find ways to avoid or reduce the impact of short squeezes.

“They might decide to reduce short positions through unlisted vehicles, or they will end up with lower short exposure overall,” he said.

But while the more traditional end of the industry looks at the noise as something that can be navigated and managed, some see the recent market activity as a reminder that history repeats itself.

“From a sentiment standpoint and based on the indicators I look at, this is a carbon copy of the dot-com bubble, even including the number of times people are Googling ‘stock market bubble,’” said Paul Schatz, president of Heritage Capital.

“Right now, it’s more concentrated to a dozen companies, but you could argue that the bubble is just getting inflated,” he added. “I guarantee you the longer this goes on the more advisers will hear from clients that they want to own the stocks that the traders are driving to record levels.”

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