To the Moon

By Nicholas Jasinski |  Wednesday, January 27 Not Fundamentals. Markets sold off broadly today, with 428 of the S&P 500's components losing value. In general, the session's trading dynamic could be summed up as junk-on, quality-off. Speculative names multiplied in value, while defensive stalwarts and cash-rich companies declined. The S&P 500 finished the day down 2.6%, to fall into the red for 2021. The Dow Jones Industrial Average lost 2%, for its longest losing streak since February 2020. The Nasdaq Composite fell 2.6%, and the small-cap Russell 2000 slid 1.9%. Energy was the best-performing sector in the S&P 500 on a day when all 11 declined. The shakier the company or sector, the better it did today. More on that below. For those who looked away from the junk stocks making triple-digit moves, it was an eventful day on the fourth-quarter earnings and economic fronts. Thirty-four S&P 500 companies reported today, including a number of giants. AT&T touted stronger-than-expected subscriber growth at its wireless business and at HBO Max, but saw fourth-quarter revenue and earnings declines practically everywhere else at the conglomerate. Management's financial forecasts for 2021 weren't seen as good enough either. AT&T stock closed down 2.1% today. More here. Boeing reported its largest-ever quarterly loss today, driven by operating losses and a $6.5 billion write-down of its 777X program. That's a new wide-body aircraft, whose delivery has been delayed to 2023.  Analysts weren't expecting it: The consensus estimate was a loss of $1.25 a share, while Boeing reported a loss of $14.65 . The stock dropped 4% today. More here. Apple, on the other hand, had a record quarter of its own. The iPhone maker generated more than $111 billion in sales and nearly $29 billion in profits in the final three months of 2020—the all-important holiday period.  Apple stock was down slightly in after-hours trading. More here. Tesla can now boast a full-year profit for the first time in its existence. But Wall Street was expecting more from the electric-vehicle leader, and earnings missed estimates. The stock dropped about 5% in after-hours trading. More here. Facebook saw a surge in its advertising business in the fourth quarter, boosting sales and earnings to record highs. But management warned that Apple's recent move to limit access to users' data for ad-targeting purposes would be a headwind going forward. Facebook stock was flat in after-hours trading. More here. This afternoon, Federal Reserve Chairman Jerome Powell noted that the economic recovery had softened since the fall, but he sounded a dovish tone. The message for markets was clear—they needn't worry about the Fed removing support before the pandemic's impact was long gone. "The path of the economy continues to depend significantly on the course of the virus," Powell said. "A resurgence in recent months in Covid-19 cases, hospitalizations, and deaths is causing great hardship for millions of Americans and is weighing on economic activity and job creation." Powell noted that the weakness was concentrated in the areas of the economy that were most adversely affected by the resurgence of the virus and by greater social distancing. Uncertainties about the vaccine rollout and new strains add to the economic risks the Fed is watching, Powell said. The Fed's policy-setting committee didn't make any changes today, holding its interest-rate target at just above zero and maintaining bond purchases of $120 billion a month. As for when the Fed could begin tapering those asset buys, the chairman kept things vague—it will take “some time,” Powell said, to make “substantial further progress” toward achieving the Fed's dual mandate goals.

 

DJIA: -2.05% to 30,303.17 S&P 500: -2.57% to 3,750.77 Nasdaq: -2.61% to 13,270.60 The Hot Stock: Iron Mountain +10.8% The Biggest Loser: L Brands -12.7% Best Sector: Energy -1.3% Worst Sector: Communication Services -3.2%

 

 

Infinity and Beyond The vertiginous rally in GameStop shares only accelerated today (the stock closed up another 135%), while spreading to several other heavily shorted stocks including AMC Entertainment (up 301%), Bed Bath & Beyond (up 43%), and Nokia (up 40%). But the phenomenon has become large enough that it’s actually making a dent in broader market action this week—which under normal circumstances would be dominated by the latest Covid-19 treatment and vaccine developments and the flood of fourth-quarter earnings reports. The top 10 most heavily shorted names in the Russell 3000 index of most U.S. stocks have moved an average of 55% since Friday, according to Tavis McCourt, institutional equity strategist at Raymond James. They have an average of 64% of their float held short. But it’s not just the top handful of names—in most cases, the greater the short interest in a stock, the more it has risen this week. No one wants to be caught on the wrong side of the next GameStop-like squeeze, and traders and short sellers are proactively getting out of the way. When they close their bets, that means buying the stock, creating demand. It also requires cash, and could necessitate selling out of other stock positions to cover the cost.  McCourt wrote today: What is happening to the equity market this week is purely technical as all of a sudden short interest has been the only factor that has mattered to stock performance. Broadly, high profile short squeezes have caused some degree of a cascading effect of covering heavily shorted names across the index, and selling consensus longs as some market participants are forced to de-lever, and many market participants are choosing to de-lever because they know that some will be forced to. Meanwhile, earnings have generally been coming in strong and 2021 consensus estimates have been rising for more companies. That’s been especially true for companies in the more cyclically oriented sectors like financials, materials, and energy. That's something that fundamentally driven investors can point to. Here’s McCourt again: This equity market appears to be driven by two variables: a classic, cyclically recovering economy, which is causing exactly the relative stock performance one would expect from cyclical sectors, and on top of that a layer of liquidity driven froth, which impacts all assets, but specifically finds its way into tiny niches of asset and equity markets that it doesn't take a rocket scientist to find. This week, another niche was added: heavily shorted, fundamentally challenged equities with high short interest. McCourt notes that the excess liquidity-driven layer doesn’t appear likely to stick around for much longer than this year, once the Federal Reserve eventually begins raising interest rates, tax rates potentially rise, and consumers start spending their savings in a post-pandemic economy rather than depositing them in their Robinhood accounts. For those investors who lack the risk tolerance to chase gains in GameStop and other surging stocks, McCourt advises a focus on the cyclical recovery aspect of the market. Fundamentals should justify the increases in those stocks even as the excess liquidity runs out—not exactly something you can say about GameStop at a $24 billion market value. Barron's has been covering the phenomenon from all angles: ·        How GameStop’s Surge Caused the Stock Market to Drop ·        GameStop’s Short Squeeze Had Consequences For These Popular Stocks. ·        These ETFs Are Up 40% on GameStop’s Wild Rally. Investors Should Be Careful. ·        GameStop Insiders Sold Stock Before It Went Vertical ·        The GameStop Phenomenon? Some of Europe’s Most Heavily Shorted Stocks Are Rising ·        GameStop Trading Should Be Halted for 30 Days, Says State Securities Regulator ·        ‘Big Short’ Investor Who Once Touted GameStop Calls Rally ‘Unnatural, Insane, and Dangerous’