GME Over
"Winners and losers, gamblers and boozers,
If they zig every time they should zag,
They're followin' the news, the obvious views,
And they're caught, baby, holdin' the bag!"
- from "Bagholder Blues", words by Joseph E. Granville
Now that the dust has settled on GameStop and the silver market 'pump-and-dump' has come unstuck, we can refocus on the real market. I see no lasting effects from the Reddit/Robinhood-fuelled stock tout game. If the guy running your money looks like Keith Gill (see above) and he's trading from a Playstation 5 maybe you should re-think your investment strategy.
And before you get all 'OK Boomer' on me, I've seen investment fads before. There is nothing new here. After making a masterful call to "sell everything" at the 1980 market top, a retail stockbroker turned investment guru named Joe Granville was the toast of the street with his "Granville Letter". His pronouncements were closely followed in the Reddit of the day - the Wall Street Journal's 'Heard on the Street' daily column.
He parlayed his notoriety into a travelling roadshow (the chat room of its day) where he regularly attracted 5,000 investors who hung on his every word after he sang his 'Bagholder Blues' song. Bombastic and clownish, he would emerge from a prop coffin and even took to bringing onstage a trained monkey dressed in a pinstripe suit, representing reviled "bankers". The press ate it up. Problem was, he stayed bearish right through the bull market of the 1980s, fighting the 'tape' that he had previously told investors was "always right". He lost followers and slipped into irrelevancy by the end of the decade. I'm looking at you, Keith.
Last week's market saw a brief shift into neutral on fears of a knock-on effect from the hedge fund blow-up as they furiously raised from their winners to fund their margin calls. Somewhat lost in the noise was the signal - great earnings. Apple and Facebook reports were spectacular. Following from the Netflix blow-out positive print, these numbers have righted the market for now.
As I said last week, the economic downshift in Q1 has provided a fillip to growth stocks as the 'Value' trade took a much-needed rest. Rotation works both ways, apparently. The much needed 'correction' that we have needed may be right under our nose. $BAC has quickly dropped over 12% from is high. This stealth correction is illustrated by the chart below. The percent of stocks below their 50 day moving average has dropped below 50%. In an environment of low real rates and strengthening earnings, this may be all we get.
S&P 500 - Stocks below 50 day Average
As well, sentiment, that had become dangerously overheated, has cooled off. The ratio of bulls to bears has quickly come down to more normal levels and is due to bounce.
AAII Bull/Bear Ratio
The path of least resistance is still higher. The problem is interest rates are looking higher too. The real test for this market won't be found on a Reddit chat thead. It will be more like the proverbial 'frog in boiling water' process. Initially, markets will welcome higher rates as they reflect improved business spending intentions and 'good' inflation. The 'good news' on the economy may come sooner than we expect. So we may see a correction once the market 'prices in' that expectation.
Meantime, the pandemic has had a positive effect on corporate cost structures given cheap borrowing costs. Apple today raised $14Bn at all-time low rates, despite enjoying a $200bn cash war chest. Not a stock that is likely to drop very much.
The longer-term ramifications of the GameStop debacle are likely to produce a better, more transparent market, and that is a good thing. The pay-for-flow model that allows Robinhood to offer 'free' commissions has effectively made high-frequency trading shops, like Citadel, the default market-makers, clipping value from active retail traders. Additionally, 'naked shorting' by pernicious hedge funds has been escaped regulatory scrutiny for far too long. These practices will undergo a long-overdue examination in the upcoming Congressional hearings into the Robinhood/GME blowup.
When the new investors begin to realize they have become the same 'bagholders' that Joe Granville talked about years ago, they will stop fooling themselves and become serious investors. That's the game that they should be playing.
Volks Stop
The last short squeeze of note that I recall was in 2008. Volkswagen stock, heavily shorted by hedge funds during the 2008 recession got squeezed by a surprise Porsche control bid. The chart below is a model that Gamestop followers should use. It became known as the "Infinity Squeeze" and caused the demise of many bearish hedgies and bullish momentum players.
Volkswagen - 2008-10
This has got me thinking about VW. Currently, the market is offering a spectacular opportunity to arbitrage global car stocks. With Tesla offering a huge umbrella of valuation, the world's carmakers look likely to gain on Mr. Musk's head-start in the EV game, both in terms of market share and value. Given the stark differentials, I expect the gap to start closing this year from both directions. After the pummelling that VW has taken from the now largely settled DieselGate scandal, it's my pick to click. $VWAGY - OTC.
Global Carmaker Mkt Cap
#1Tesla $795.8
#2Toyota $207.5
#3Volkswagen $96.7
#4BYD $92.7
#5NIO $89.5
Risk Model: 2/5 - Risk Off
The trusty is Model 'flashing red' right now as a result of the VXV spike and the quick drop in AAII sentiment. This seems destined to quickly reverse if the calming actions of the past two sessions are any indications. Both measures should regain their positive footing this week, negating the sell. It is the intermediate measure of 'overbought' - distance from the 200 dma -that remains troubling. The negative connotations of this indicator are currently being 'worked-off' by a sideways rotational churn.
More troubling is the interplay of copper and gold, both currently under pressure. The copper bulls are waking up to the seasonal slowing in China while the gold bugs are caught up in the strong dollar reversal trade. Stay tuned. I am out of my metals right now but I smell a trade shaping up into the second quarter "restart anticipation" trade. Meantime, the Financials as a group have corrected nicely after the interest rate downdraft of the last few weeks and look set to rally again spurred by rising 10 Yr yields. The play here is - long $TBT and $XLF.
Then it's $CPER.
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