Chart of the week: FTSE and the GameStop saga – is there a link?
The activist Reddit investor short squeeze could mean these shares will be in the spotlight next.
1st February 2021 16:06
by John Burford from interactive investor
The activist Reddit investor short squeeze could mean these shares will be in the spotlight next.
I am sure there are few investors not following the gripping drama surrounding the GameStop (NYSE:GME) affair, which is being covered blow-by-blow by the mainstream media.
Since the news broke of the short squeezes engendered by Reddit group WallStreetBets on some minor equities that were shorted by hedge funds, the FTSE 100 has declined sharply.
So the question is this – is there any connection? After all, massive fund losses have resulted from rising share prices, so why would a stock index be hurt by these advances?
A rising share price usually is the result of a more positive sentiment towards the company – but not here. Far from it. It is the consequence of the extreme bearish stance of the funds where the short interest has gone over the top and exceeded well over 100% of the float in some cases.
But what a perfect scenario for a short squeeze – and what a squeeze!
Source: interactive investor. Past performance is not a guide to future performance.
As I noted to clients last week, there will be two main trends for investors in the near-term. First, shares that have been heavily shorted will be targets for the WallStreetBets investors to run up. We are seeing that in the outperformance of a basket of most-shorted US shares.
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And in the UK, the much-depressed and heavily shorted Petrofac (LSE:PFC) shares have risen by 20% off the low point.
Second, shares that have been manically bought to extreme heights of valuation - Tesla (NASDAQ:TSLA) and the FAANG stocks (Facebook (NASDAQ:FB)Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google (Alphabet (NASDAQ:GOOGL)) - being the most prominent) will see strong selling pressure. That is being caused by the necessity of hedge funds to sell holdings to raise capital to cover their losses on their shorts.
Of course, the big test will come if the Federal Reserve tries to inject even more dollars into Wall Street to prevent a crash. Hmm.
But the US short squeeze ramifications are showing up in the FTSE. I have had a major upside target around the 7,000 mark for some time. It hit that target on 8 January and has fallen by 9% so far. Here is my updated chart:
Source: interactive investor. Past performance is not a guide to future performance.
If my wave labels are correct, we are starting a sharp wave three of three lower, which is one of the strongest waves in the book. Extreme investor caution remains advised.
The big question is: will the GameStop butterfly flapping its wings in the outer reaches of the stock market about to unleash a tornado in the main indices?
John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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