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On early Tuesday Dow Future crumbled almost -600 points on the concern of stimulus, COVID and hedge fund liquidation amid great gamma/short squeeze forced by the army of Robinhood (retail) traders (now on WallStreetBets/Reddit). Wall Street was already under stress ahead of Fed on monetary stimulus and COVID uncertainty. The market is concerned about Fed’s taper tantrum; i.e. QE tapering, most probably from H2-2022 after the completion of mass-vaccinations (COVID) and visible development of herd immunity on both sides of the Atlantic (U.S.-Europe).
The market is expecting Fed/Powell may signal some types of gradual QE tapering after H2-2022 to prepare the market for the eventuality. Also, elevated inflation due to supply chain disruption and the deluge of fiscal stimulus may prompt Fed to normalize its ultra-accommodative monetary policies gradually from early 2023; i.e. Fed may begin to hike from 2023.
The market is also concerned about the possible delay in Biden’s CARES Act 3.0 (fiscal stimulus). Biden may prefer bipartisan agreement rather than the ‘budget reconciliation’ process for passage of CARES Act 3.0 by the U.S. Congress. Biden, being an experienced politician as-well-as administrator, knows very well how Capitol Hill/U.S. politics & policies work.
Thus Biden is emphasizing consensus/bipartisan agreement rather than using the once-in-a-year nuclear option of ‘budget reconciliation’ path to approve his bills/CARES Act. And Biden also knows very well he has to compromise on his CARES Act 3.0 proposals for $1.9T by as much 50% for such bipartisan agreement/deal-making process.
But the sudden plunge of Dow, Nasdaq, SPX-500 as-well-as Gold future early U.S. session Wednesday may be linked to the growing concern of several big hedge fund liquidation. Some of the most widely held hedge fund stocks were plunged amid growing concerns that those hedge funds which shorted some small/mid-cap stocks against the Robinhood army of so-called novice retail traders will have to dump their holdings in forced liquidations to provide margin money/interim capital.
The recent (post-COVID) Robinhood euphoria for small/midcaps was triggered basically by WFH culture and backed by central bank QQE/easy and low-cost margin money coupled with stimulus checks. And now the financial/capital market is no longer a monopoly of institutional investors/traders/market participants. Together as retail traders, the Robinhood army is now providing a formidable challenge for institutions and prop traders/stock brokers. Generally, stockbrokers/prop traders/dealers bet against their clients/retail traders (as of market makers/liquidity providers). Stocks being bought by clients/retail traders were sold by market makers and vice-versa; market makers earn from the spread and often forced to take the option route to hedge their risk.
In the present case, a small-cap stock called GME (video game makers/retailers GameStop) and certain other stocks are trading like Bitcoin (BTC); i.e. there is huge volatility. The story behind GME is that Chewy co-founder Cohen, who has accumulated a significant stake in GME as an activist investor, secured a seat on the board of directors, will be able to help transform the company's digital transformation. Moreover, Tesla CEO Musk tweeted about GME, causing more short/gamma squeeze. And Musk was also served SEC notice!
The market buzz is that some hedge funds like Citron, Maplelane and Melvin may have been trapped in such short/gamma squeeze involving GME as-well-as Bed Bath & Beyond and GSX. These hedge funds are now being bailed out by some investors by proving huge margin money/fresh capital to avoid further domino effect on Wall Street.
On mid-Wednesday, Wall Street was also trying to recover from hedge fund panic low after the White House spokeswoman Psaki said Biden’s economic team including Treasury Secretary Yellen is monitoring the Reddit-stock market situation (short/gamma squeeze).
All these Robinhood euphoria may be a sign of an excessive stock market bubble, but should not be a real concern unless central banks/Fed/Powell signals QE tapering, blast-off (gradual rate hikes) and governments (US/Europe/AEs) stop further stimulus checks to stimulate Wall Street as-well-as Main Street. The market was already overdue for a healthy correction and this hedge fund liquidation concern just acted as an excuse amid hopes & hypes of a big CARES Act 3.0
Technical view: SPX-500, DJ-30, and NQ-100 Futures:
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