A tug of war between solo stock traders piling into GameStop and seasoned hedge funds betting against the U.S. video game retailer has unleashed a wave of copycat trades.
Retail investors who have squeezed institutional short sellers, are also forcing them to cover their losses by selling long positions in other stocks, opening a Pandora’s box and rattling blue chip indexes from Asia to Europe.
Far from being limited to niche segments, the ‘Reddit crowd’, with its use of call options and coordinated buying, has had a direct impact on the overall stock market.
Stocks which hedge funds bet against the most have soared, while their own favourites lost out due to the selling pressure.
A basket of stocks traded mostly by hedge funds has fallen 2.5% so far this year, while a basket tracking retail favourites jumped 13.5%, data from Goldman Sachs showed.
It did not take long for the success of the ‘long the shorts’ trade to be emulated by investors in Asia and Europe who have also piled into stocks which were popular shorts.
In Europe, publisher Pearson, drugmaker Evotec and commercial property firm Unibail-Rodamco and Klepierre were all big gainers this week.
Heavily-shorted Australian stocks Webjet, Tassal Group, Inghams and InvoCare all rose on Thursday, while the benchmark ASX 200 index .AXJO fell 2%.
Market watchers identified dozens of stocks potentially vulnerable to extreme volatility after a buying spree from an army of retail traders in recent days prompted hedge funds to unwind their bets against GameStop and other companies, fueling surges in their share prices in a phenomenon known as a “short squeeze.”
“Unfortunately, it’s definitely not a one-off thing,” said Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research. “The type of activity that drove that higher, I believe, has caused people to try to duplicate that in other names.”
J.P. Morgan earlier this week named 45 stocks that may be susceptible to short squeezes and similar “fragility events,” including real estate company Macerich Co, restaurant chain Cheesecake Factory Inc and clothing subscription service Stitch Fix Inc.
Like GameStop, American Airlines Group Inc, AMC Entertainment Holdings Inc and others that have recently become targets of retail traders in recent days, all the stocks have high short interest ratios.