Goldman Warns If The Short Squeeze Continues, The Entire Market Could Crash

Talk Markets ^

[TigerClaws]

Last Friday (Jan, 22) we advised readers who thought they had missed the move in GameStop (they hadn't), to position appropriately in the most shorted Russell 3000 names which included such tickers as FIZZ, DDS, BBBY, AMCX, GOGO and a handful of other names, as it was likely that the short-squeeze was only just starting.

We were right and all of the stocks listed above - and others - exploded higher the coming Monday, and all other days of the week, with results - encapsulated by the WallStreetTips vs Wall Street feud - that has become the top conversation piece across America, while on WSB the only topic is the phenomenal gains generated by going long said most shorted stocks. To wit, the basket of top shorts we compiled on Jan 22 has tripled in the past week.

And while some are quick to blame last week's fireworks on the "dopamine rush" of traders at r/wallstreetbets who seek an outlet to being "copped up with little else to do during the pandemic" (as Bloomberg has done), the reality is that at the end of the day the strategy unleashed by the subreddit is merely an extension of the bubble dynamics that were made possible by the Federal Reserve (of which Bloomberg is also a very staunch fan) pumping trillions and trillions of shot-gunned liquidity into a financial system where there are now bubble visible anywhere one looks. In short, main street finally learned that it too can profit from the lunacy of the money printers at the Eccles building, and some are very unhappy about that (yes, it will end in tears, but - newsflash - $300 trillion in debt and $120BN in liquidity injections monthly will also end in tears). That aside, one week later, Goldman has finally caught up with what Zero Hedge readers knew one week ago, and all the way down to a chart showing a basket of the most-shorted Russell 3000 stocks...

Goldman's David Kostin has published a post-mortem of what happened last week, writing that "the most heavily-shorted stocks have risen by 98% in the past three months, outstripping major short squeezes in 2000 and 2009."

He then points out something we discussed in "Hedge Funds Are Puking Longs To Cover Short-Squeeze Losses", noting that while aggregate short interest levels are remarkably low (imagine what would have happened has shorting been far more aggressive marketwide) "the -4% weekly return of our Hedge Fund VIP list of the most popular hedge fund long positions (GSTHHVIP) showed how excess in one small part of the market can create contagion."

Hedge funds were forced to cover (as well as paying for margin calls), and as part of the broader degrossing they also had to sell some of the favorite hedge fund names across the industry, in this case represented by the Goldman Hedge Fund VIP basket.

Yet what may come as a surprise to some, even as hedge funds deleveraged aggressively and actively cut risk this week, gross and net exposures "remain close to the highest levels on record" (something which may come as a huge surprise to Marko Kolanovic who has been erroneously claiming the opposite), suggesting that if the squeeze continues, hedge funds are set for much more pain.

According to Goldman Sachs Prime Services, this week "represented the largest active hedge fund de-grossing since February 2009. Funds in their coverage sold long positions and covered shorts in every sector" and yet "despite this active deleveraging, hedge fund net and gross exposures on a mark-to-market basis both remain close to the highest levels on record, indicating ongoing risk of positioning-driven sell-offs." With that in mind, here are Kostin's big picture thoughts: It was a placid week in the US stock market – provided one was a long-only mutual fund manager. US equity mutual funds and ETFs had $2 billion of net inflows last week (+$10 billion YTD). Although the typical large-cap core mutual fund fell by 2% this week, it has generated a return of +1.3% YTD vs. S&P 500 down -1.1%. However, life was very different last week if one managed a hedge fund. The typical US equity long/short fund returned -7% this week and has returned -6% YTD. With the average WSB portfolio up double digits this past week, one can see why hedge funds are upset. Anyway, moving on: The past 25 years have witnessed a number of sharp short squeezes in the US equity market, but none as extreme as has occurred recently. In the last three months, a basket containing the 50 Russell 3000 stocks with market caps above $1 billion and the largest short interest as a share of float (GSCBMSAL) has rallied by 98%. This exceeded the 77% return of highly-shorted stocks during 2Q 2020, a 56% rally in mid-2009, and two distinct 72% rallies during the Tech Bubble in 1999 and 2000. This week the basket’s trailing 5-, 10-, and 21-day returns registered as the largest on record.

Thanks Goldman, and yes, your "brisk assessment" would have been more useful to your clients if it had come before the event (like, for example, this) instead of after. Kostin then goes on to point out that the "mooning" in the most shorted stocks took place even though aggregate short interest was near a record low (imagine what would have happened had short interest been higher), which is odd because historically, "major short squeezes have typically taken place as aggregate short interest declined from elevated levels. In contrast, the recent short squeeze has been driven by concentrated short positions in smaller companies, many of which had lagged dramatically and were perceived by most investors to be in secular decline" to wit: Unusually, the rally of the most heavily-shorted stocks has taken place against a backdrop of very low levels of aggregate short interest. At the start of this year, the median S&P 500 stock had short interest equating to just 1.5% of market cap, matching mid-2000 as the lowest share in at least the last 25 years. In the past, major short squeezes have typically taken place as aggregate short interest declined from elevated levels. In contrast, the recent short squeeze has been driven by concentrated short positions in smaller companies, many of which had lagged dramatically and were perceived by most investors to be in secular decline. Of course, there is nothing "historical" about what happened last week, because - as we all know - the biggest difference between the typical short squeeze of the past and the recent rally in heavily-shorted stocks "was the degree of involvement of retail traders, who also appear to have catalyzed sharp moves in other parts of the market." Why thank you WSB, but that's ok - you will be handsomely rewarded. Last week we discussed the surging trading activity and share prices of penny stocks, firms with negative earnings, and extremely high-growth, high-multiple stocks. These trends have all accompanied a large increase in online broker trading activity. A basket of retail favorites (ticker: GSXURFAV) has returned +17% YTD and +179% since the March 2020 low, outperforming both the S&P 500 (+72%) and our Hedge Fund VIP list of the most popular hedge fund long positions (GSTHHVIP, +106%).

So why does this matter? One simple reason: contrary to the bizarrely nonchalant optimism spouted earlier this week by JPMorgan's Marko Kolanovic who said "any market pullback, such as one driven by repositioning by a segment of the long-short community (and related to stocks of insignificant size), is a buying opportunity, in our view," Goldman has a far more dismal take on recent events, and writes that "this week demonstrated that unsustainable excess in one small part of the market has the potential to tip a row of dominoes and create broader turmoil."

He then picks up on what he said last weekend when responding to Goldman client concerns about a stock bubble, which we summarized in "Goldman's Clients Are Freaking Out About A Stock Bubble: Here Is The Bank's Response", and which turned out to be 100% warranted, and writes that "most of the bubble-like dynamics we highlighted last week have taken place in stocks constituting very small portions of total US equity market cap. Indeed, many of the shorts dominating headlines this week were (prior to this week) small-cap stocks. But large short squeezes led investors short these stocks to cover their positions and also reduce long positions, leading other holders of common positions to cut exposures in turn." As a result, Goldman's Hedge Fund VIP list declined by 4%. Which is a problem because as Kostin concludes, "in recent years elevated crowding, low turnover, and high concentration have been consistent patterns, boosting the risk that one fund’s unwind could snowball through the market." Translation: if WSB continues to push the most shorted stocks higher, the entire market could crash. And since Kostin admits that "the retail trading boom can continue" as "an abundance of US household cash should continue to fuel the trading boom" with more than 50% of the $5 trillion in money market mutual funds owned by households and is $1 trillion greater than before the pandemic, what happens in the coming week - i.e., if the short squeeze persists - could have profound implications for the future of capital markets.

[moovova]

.

[SaxxonWoods]

It’s amazing to read all the idiotic comments from people who think they won’t be hurt if the entire market crashes because they are in stocks.

You will be the ones most hurt, fools.

[nevergore]

"Man can’t live by bread alone You getting worried the Babylonian system might fall?"

You hold on to that thought Don Quixote........

[Irenic]

aye

[HamiltonJay]

Jeez, melodrama much?!??

A lesson is being learned... you put too much short pressure on a singe stock, you set yourself up to get burned....

There isn’t a hedge fund in existence that would not happily bankrupt another one to make themselves billions if they had the resources and will to do it.

[aMorePerfectUnion]

No sympathy for any foolish hedge fund that failed to close out their short and left it unlimited.

[Repeat Offender]

Speaking of price inflation RE sliver......

In 1964, the last year the U.S. minted 90% silver quarters, you could buy a gallon of gasoline with a quarter.

Current spot price of 1oz silver is $27.15. ($27.15 x .9 = $24.435) $24.435/4 = ~$6.11. Or enough to buy ~ 2.5 gallons of gasoline.

That aside, there's supposedly a "short squeeze" on silver as there are more certificates than bullion. Folks on Zerohedge, Reddit, and other social media platforms have been discussing this.

The basic premise is to buy physical bullion, and or silver shares ($SLV). Hedge funds shorting silver will have to buy to cover the short, thus driving up the price (and the value of "retail investors'" holdings).

The lack of physical bullion, and volume of people requesting physical delivery, adds to the scarcity, and increases the difficulty the hedge funds will have covering the shorts - further accelerating the price and the "value" of retail's holdings.

[huldah1776]

posted this a couple of minutes ago but I know that not getting a notice of replies on Freeper leaves many of my questions unanswered...so again

IF they crash the market, will that be the opportunity to go back to the gold standard and get rid of the fed? Just wondering.

[qaz123]

Haven’t we heard this before?

Generation Zero on YouTube.

https://m.youtube.com/watch?v=dNS0oE5POL4

[ConservativeMind]

The “Market” would not “crash” if the shorts were done by hedge funds owning the stock or having options from owners.

If “naked shorts” are what the economy is built upon, then it really needs to all crash down.

[Mouton]

The “market” as originally envisioned was a place for capital formation. Companies either formed or grew by the issuance of shares to investors. Original issue or secondary offerings.

Then along came some bright lights who decided to get around the “income” angle by making the sales of stock a capital item to get around the confiscatory ordinary income tax rates. IMO, if one sells stocks that had been purchased from a company as part of an IPO or a secondary offering, that is a capital item. However, when stocks get traded daily from one to another, those transactions have nothing to do with capital formation, rather, they are just an exotic form of gambling.

Selling stock short is therefore nothing to do with capital formation, it is a bet against someone who feels their stock is fairly valued.

Brokerage house will fight the outlawing of this procedure as they make money lending stock to someone to sell. As we see in the GME example, some have been lax on ensuring they have the actual shares in their possession to sell short, a requirement but apparently not enforced till some debacle like this happens.

Heap on top of all this the amount of worthless money sloshing about the system, deficit spending beyond the max, the the market is teetering on its head as it spins out out of controls. When it crashes, which it has to do by hyper inflation or over supply of worthless stocks, the Capital system will get the blame when the actual nemesis is greed coupled with a desire to get something for nothing.

[delchiante]

And you hold on to that Goldman, Nevergore.

[Mouton]

You will be the ones most hurt, fools.

That includes those who have hugely bet on their IRAs. Those mutual funds hold STOCKS mostly.

[null and void]

Is it possible this is not Reddits, but China attacking again? Is it possible this is part of the currency war to crash the dollar or all government currencies and usher in the new global digital currency?

Not to put too fine a point on it, yes, yes it is possible, if not highly probable.

The government wants to disarm us after 244 yrs 'cuz they plan to do things we would shoot them for!

At no point in history has any government ever wanted its people to be defenseless for any good reason ~ nully's son

The biggest killer of mankind

Nut-job Conspiracy Theory Ping!

To get onto The Nut-job Conspiracy Theory Ping List you must threaten to report me to the Mods if I don't add you to the list...

[Jewbacca]

No one is buying into that scam, mr Perot.

[Mariner]

If there’s THAT much gambling and manipulation in the market, it NEEDS to crash.

Clear out all that dead wood.

[nevergore]

"And you hold on to that Goldman, Nevergore."

There is a position in between continuing the current status quo and total destruction......😎

BTW, I always have a firm hold of my "Goldman" while Freeping.....LOL

[EBH]

NO!

It is the WEF opportunity to go to the global digital currency.

Great Reset

Joe Biden is a member of the WEF since 2003, he has not problem letting this happen

[EBH]

https://cryptonews.com/news/a-hint-from-davos-2021-regulating-crypto-is-in-the-public-in-9011.htm

A Hint From Davos: Regulating Crypto Is ‘in the Public Interest’

[Vaduz]

Hedge funds get beat at their own game about time.