Share Prices & Company Research


01 February 2021

Wall Street ‘Short Squeeze’ Steals the Show

US Markets saw extraordinary levels of volatility last week with the CBOE S&P 500 volatility index (VIX) – which measures the market’s expectations of volatility in the next 30 days – rising 62% to 32.32. As investors anticipated a number of earnings reports from large tech companies, including the likes of Tesla, Apple and Facebook, high trading volumes were expected. However, it was not a busy earnings week, nor were the big names making the most noise in the US markets.

The video game and merchandise retailer GameStop (GME), a business which has struggled to keep up in the modern world, saw prices rise almost 700% from the beginning of the week as retail investors on Reddit’s Wall Street Bets forum formed an optimistic bet on the future of the company and its share price. Prior to last week, GameStop was the most shorted stock on Wall Street with an open short interest of 139%, leading investors within the Reddit community to the idea that hedge funds taking large short positions could theoretically be open to unlimited downside if the share price was driven high enough.

As investors piled into GME, the drastic increase resulted in a short squeeze, where short sellers of GameStop were forced to cover themselves by purchasing shares as a hedge against their losses. The price then escalated further and, as loss-making short positions were closed out, the shares were bought back into the market, sending price even higher. Consequently, trading in GME was halted several times, with Robinhood and Interactive Brokers eventually restricting trading to position closing only. GME’s share price has since fallen from a high of US$482 to US$197 with many unable to buy the stock through their brokers. The decision from Robinhood and other brokers to limit purchases could be damaging to their reputation; some customers have been left frustrated and even took to Twitter to question Robinhood’s mission to democratise investing for everyone. Along with GME, multiple other companies such as AMC Entertainment and Nokia saw astonishing gains, which sparked worry that members of internet chat forums have the ability to collude and inflate prices of share companies that supposedly have little value or growth prospects.

Mass hysteria surrounding the whole situation seemed to have a knock-on effect to the US S&P 500, which dropped 500 points last Wednesday - its worst day since October. Across the board, the Nasdaq was down 3.47%, the Hang Seng Index -6.42%, and the EuroStoxx50 is -2.29% for the week. The FTSE 100 saw marginal losses for the second week in a row, falling -3.22% from the beginning of the week. No specific event can be attributed to the decline, but fear from investors around the situation in US markets could have led to the sell-off. Despite that, a number of FTSE 100 companies reported resilient earnings this week: alcoholic beverage retailer Diageo reported EPS of 69.9p vs consensus of 67.8p while net sales also beat expectations at £6.8bn compared to £6.56bn. FeverTree, the non-alcoholic drinks company, offered a trading update which reported prelim total revenue at £252.1m vs £243.1m consensus. UK sales fell £29.3m but US revenue picked up some of the slack – rising £10.9m. Although revenue was down from the previous year for both, the results beat expectations and provided confidence for their position going into 2021.       

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Wall Street ‘Short Squeeze’ Steals the Show

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