Why The GameStop Short Squeeze Will End up Hurting Investors

The market sunk today as amateur traders put the squeeze on certain stocks. GameStop (NYSE: GME), AMC Entertainment (NYSE: AMC), National Beverage Corp. (NYSE: FIZZ), and others rocketed higher while hedge funds scrambled to cover their shorts.

In a typical short squeeze, where traders end up buying the stock they’re shorting to cut their losses, the resultant gain in the stock usually peters out after the initial burst.

This time, however, the insanity has gone parabolic. GME briefly touched a new record high of $380 this morning. Melvin Capital, the most well-known hedge fund short on GME, finally capitulated and covered its short.

“These moves end when they end, and generally with pain to the winners,” warned Gregory Faranello, head of U.S. rates trading at AmeriVet Securities.

“Short gamma positions can be very painful. Couple this with large outright bets that go against the hedges that need to happen, and you have a dislocated, parabolic market where buying begets more buying.”

GME closed for a gain of 133.82%. The stock’s short interest – the quantity of shares that investors have sold short but not yet covered or closed out – still sits at 140%. That means there are many more short positions out there that have yet to cover.

The more shorts that surrender, the higher GME will go. But the brick-and-mortar video game retailer wasn’t even today’s top gainer. AMC dwarfed GME when it gained a whopping 300% on the day.

Keep in mind, the surge continued after both Melvin Capital and Citron Research announced that their short positions had been “mostly covered” by now. They were targeted by traders on Reddit, who hoped to induce a short squeeze by buying-up the market’s most shorted stocks as a group.

What once started as a speculative play has quickly developed into a war against Wall Street. Melvin Capital needed a $2.75 billion bailout from other hedge funds following the squeezes. Andrew Left, the editor of Citron Research and former holder of GME shorts, said they’re faring far better.

“I’m just fine. Citron Capital is just fine. Covered a majority of the short in the $90s,” Left remarked.

“I learned from Tilray, it was a killer. It went all the way back to $6. I expect the same thing from GameStop, but I have respect for the market. I also have respect for the people at the WallStreetBets Reddit message boards. Before there was WSB, there was Citron Research. We were the voice of the individual investor against the institutions.”

Left has long been described as an “activist investor.” He’s spent many years successfully shorting corporations that he believed were either immoral or fraudulent. And in a cruel twist of fate this week, retail investors turned on Left.

Now, they consider him part of the “institution.” And they’re right, Citron Capital is an institutional investment group.

But what the “short squeezers” haven’t realized is that, ultimately, the hardest-hit casualties of this continued behavior will be long-term, buy and hold investors set to retire soon. In order to bail out Melvin, other hedge funds – Citadel and Point72 – had to sell their long positions on more widely held stocks.

If more hedge funds end up needing bailouts, a domino effect could quickly follow, unfairly slicing through the market’s top performers.

And, by proxy, anyone ready to cash-out of their retirement portfolio.

Sure, Wall Street will feel a little pain. But in the long run, they’ll snap-up failing hedge funds for cents on the dollar, eventually flipping them into highly profitable value plays.

So, if you, a stimulus-check-laden retail investor, want to contribute to the madness, go right ahead.

Just know that the “fat cats” are mostly equipped to weather the short squeeze storm. Everyone else will become collateral damage in the war on Wall Street, no matter how much higher GME’s “moonshot” extends from here.


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