Exuberantly Angry

It’s a sign of just how historic a top this is going to be.

The Fed meeting would normally have been the major talking point in
markets this week, but there’s really only one thing everyone is looking at.
Yes, the incredible short squeezes in stocks.

GameStop (GME) gets the headlines, but there are a number of others being
squeezed higher, such as Bed Bath and Beyond Inc. and AMC Entertainment
Holdings. At the start of January, GME was trading at RM72.88 ($18) a share.
This week it printed RM1538.62 ($380) (possibly much higher or lower by the
time this is read!). On the face of it, the driver behind the sudden advances in
these stocks has been forced buying by funds that were holding large short
positions. There’s also the so-called gamma effect whereby market makers
have to buy more and more stock in a rising market to hedge option
contracts that have been sold to investors. Those, at least, are some of
the mechanics.

What’s really behind it is much more fascinating.

These “reddit board” retail traders that have been credited (or blamed) for the
explosions in the stocks give us an interesting insight into current
psychology. Some commentators have stated that this is a revolution in
financial markets, where the retail traders get to boss around the institutions.
The retail traders are angry, people say, and want to “stick it to the man.” We
disagree. It’s not a revolution. They’re not railing against the system,
they’re embracing it.

What many of these retail traders think they are doing is out-smarting
institutions for being short a stock. That’s a sign of extreme
bullishness. “What d’ya mean you’re short?! Don’t ya know stocks can only go
up?!”

This episode is also a classic sign of incredible excess liquidity sloshing

around the markets. A click on your mouse and you can be leveraged to the
hilt in a second.

And it is a quintessential display of retail herding behavior, of course. “Join

the message board crowd or lose out!”
Excess bullishness, excess liquidity and retail herding behavior. These are all
attributes of exuberance seen at historic stock market tops.

Two of the most famous short squeezes came over a hundred years ago. In
1901 it was Northern Pacific Railway, and in 1907 it was United Copper. Both
squeezes are still remembered because they occurred just before major
crashes in the stock market.

Will the GameStop squeeze still be talked about in a hundred years’ time?
Given our bearish Elliott wave outlook for the stock market, we think it might.