![]() ![]() ![]() The most this stock has ever been worth was around $60 in the run-up to the financial crisis of 2008. Should GME shares be worth $350? No, of course not, in my view. The stock is currently up by close to 9,000% over the past year. As a flurry of institutional investors rushed to cover their positions, the combined effect of shorts running for the doors and extremely high amounts of liquidity entering the stock fueled shares to skyrocket. As excess liquidity flowed into GameStop shares, it unleashed one of the greatest and possibly the most irrational short squeeze in stock market history. I don't think that even the participants expected the results that we witnessed. Well, it worked, and this is nothing like I have ever seen in my 20 years of investing. Then the retail investors proceeded to implement social media platforms to essentially pool their resources and coordinate the attack. So, how is it that this stock is approaching $400? It appears that a group of "retail" investors identified this stock as a concentrated stronghold for short sellers and decided to orchestrate a short squeeze. I don't think $3-4 is a fair valuation for GME, but perhaps $10-20 is. GameStop is a stock that was heavily shorted, and possibly it was undervalued at some point. Well, now they are trading at around 100 times that. ![]() Remarkably, shares were around $3-4 roughly a year ago. I'm sure that just about everyone has heard of GameStop ( GME) by now. This typically leads to a shift in momentum as the market essentially runs out of buyers, and sellers start to control price action.Īnother sign that the market may be ready for a break is some extremely atypical phenomenon. This divergence implies that momentum is weakening, and that fewer buyers are bidding up certain areas in the market. We can see this quite clearly in many stocks, ETFs, even major market averages. The RSI divergence is when we see the RSI peak at a lower price point relative to its latest high. This is present, but is not as pronounced in SPX and other major market averages, as it's in some of the sky high flying segments like solar/alternative energy, lithium, and other frothy segments. On the one hand, we likely have increased call buyers chasing performance, and on the other hand, we likely have "smart money" purchasing put options to hedge existing positions. This phenomenon implies that traders are increasing options purchases. When we see the SPX and the VIX both moving higher for an extended period of time, it raises concern and is typically a prelude to a pullback/correction in stocks. In fact, the VIX was about 20% off its lows by Wednesday, but the SPX was around ATHs or roughly 6% above where it was back at the start of December. The fact that the VIX hit a low of about 20 around two months ago, but the S&P 500/SPX ( SP500) kept moving higher and higher led to a clear divergence in recent weeks. Primarily we discussed the VIX and the RSI divergences. We talked about technicals being a problem in pre-market yesterday. This was further reinforced by the Fed's remarks on the economy and the slower than expected growth path to recovery Wednesday. In fact, the prospects for a V-shaped bounce back don't appear all that realistic anymore. This is quite the drop and suggests that the COVID-19 pandemic is causing more systemic damage to the global economy than was expected. Earlier, we spoke about news out of Germany and other countries announcing slower than expected economic growth projections.įor instance, Germany recently cut its 2021 GDP growth forecasts to 3% from a previous estimate of around 4.4%. The first and foremost catalyst that comes to mind right away is slower than anticipated growth. Well, let's attempt to pin down the reasons for the decline. So, was this just a one-day event, or is the selling likely to persist? Wednesday was officially the worst trading day of 2021, and the single worst trading session since October 2020. ![]()
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