U.S. stocks fell sharply on Friday, wrapping up a roller-coaster week on Wall Street as heightened speculative trading by retail investors continued to unnerve the market.
The Dow Jones Industrial average lost 620.74 points, or 2%, to 29,982.62, the first time the 30-stock gauge has closed below the 30,000 mark since Dec. 14. The S&P 500 fell 1.9% to 3,714.24 as 10 sectors registered losses. The Nasdaq Composite slid 2% to 13,070.69 as Apple dropped 3.7% and other major tech names slipped.
All three major averages dropped more than 3% this week, posting their worst week since October. For January, the blue-chip Dow and the S&P 500 fell 2% and 1.1%, respectively, suffering their first negative month in four. The tech-heavy Nasdaq eked out a 1.4% gain on the month.
Shares of GameStop jumped 67.9% after Robinhood said it would allow limited buying of the stock and other heavily shorted names after restricting access the day before.
Robinhood raised more than $1 billion from its existing investors overnight, in addition to tapping bank credit lines, to ensure it had the capital required to allow some trading again in volatile stocks like GameStop.
Investors are concerned that if GameStop continues to rise in such a volatile fashion, it may ripple through the financial markets, causing losses at brokers like Robinhood and forcing hedge funds who bet against the stock to sell other securities to raise cash.
There are also fears that the GameStop mania is a sign of a larger bubble in the market and that its unraveling could also cause turbulence and hit retail investors hard. A number of lawmakers also called for an investigation into the chaotic trading. The Securities and Exchange Commission said Friday it will look into regulated body’s actions to uncover if the decisions made disadvantaged investors.“There’s way too much leverage in the system, and we’re starting to see signs that this excess leverage is going to be unwound in a way that will create headwinds for the stock market and other risk assets for more than just a few days,” said Matt Maley, chief market strategist at Miller Tabak.Meanwhile, new trial results from Johnson & Johnson’s coronavirus vaccine disappointed some investors because it was less effective on some variants, also hurting market sentiment.
J&J said its one-dose vaccine demonstrated 66% effectiveness overall in protecting against Covid-19. The vaccine was 72% effective in the United States, 66% in Latin America and 57% in South Africa after four weeks, the company said. The vaccine however offered complete protection against Covid-related hospitalizations. Shares of JNJ dropped 3.6%.Stocks had rallied to record highs on the hope that vaccines would be effective against Covid to allow a smooth economic reopening before the end of the year. New mutations more resilient to vaccines could upend that rosy outlook for invesors.
Volatility spiked this week as the retail trading frenzy kept Wall Street on edge. The Dow lost more than 600 points on Wednesday, suffering its worst sell-off in three months. Then the blue-chip benchmark rebounded by 300 points on Thursday amid a broad market rally. The Cboe Volatility Index, known as the VIX, jumped above 33 Friday.
The market also experienced the highest trading volume in years as the mania heated up. On Wednesday, total market volume hit more than 23.7 billion shares, surpassing the level during the height of the financial crisis in 2008. Thursday also saw extremely heavy trading with more than 19 billion shares changing hands.
A wave of retail traders have been motivating each other on the red-hot WallStreetBets Reddit forum to pile into the most hated names by hedge funds, creating massive short squeezes in the stocks. GameStop has soared more than 1,600% in January, while AMC Entertainment has rallied over 500% this month.Billionaire bond investor Bill Gross sounded alarms on this week’s intensifying speculative mania in his investment outlook released Friday.
“This apparent budding crisis needs regulatory warnings and mainstream media alerts as to the dangers this week, both to overall markets and individual investors,” Gross wrote.
Still, some believe since the retail crowd is concentrating on just a handful of names, the influence on the overall market should be limited for the time being.
“While we believe there is more pain to come we remain optimistic that it is likely to remain localized,” said Maneesh Deshpande, head of equity derivatives strategy at Barclays. “Market exposure of long-short hedge funds is relatively small, indicating little impact to the overall market due to deleveraging.”
What a week, what a week, there's a lot to cover starting with the mania and hype surrounding Reddit's WallStreetBets.
I must admit, even I got caught up in the frenzy, believing there's an army of neophyte traders mobilizing on social media platforms and using WSB to squeeze short sellers and "evil" hedge funds.
But today, I took a cold shower in the morning, watched an older clip from the late great George Carlin on The American Dream, and reminded myself of who really runs the show on Wall Street, and it ain't the 19-year-old YOLOs day-trading using WallStreetBets recommendations (for those of you who may not be up to snuff with the acronyms, YOLO = you only live once).
Remember that book I keep touting on my blog, The Power Elite, written by C. Wright Mills in the mid 50s?
I suggest a lot of the YOLOs day-trading, putting all their money in GameStop, AMC, bitcoin, and whatever else "everyone else is doing" take the time to read this book, after they watch George Carlin's clip.
Let me explain. This week was nothing more than mass hysteria, even the media, AOC and Donald Trump got caught up in the craze.
Sure, it made for a lot of entertainment, we even witnessed a Twitter rumble between hedge fund billionaire Steve Cohen and day-trading poster boy Dave Portnoy over GameStop.
Portnoy has been very active on Twitter going after Cohen, Citadel's Ken Griffin, Melvin Capital's Gabriel Plotkin and many others. Most of the things he says are nonsense but he does raise good points here and there, like how Robinhood and a few other trading platforms were pressured to restrict trading on a few stocks the WSB crowd were touting.
Anyway, by Friday afternoon, Steve Cohen had enough and tweeted this:
Anyway back to the Mets
— Steven Cohen (@StevenACohen2) January 29, 2021
BOOM! Mic drop! It was Cohen's way of saying he had enough sparring with the day-trading plebes on Twitter, they will all learn the hard way who really runs the show on Wall Street.
And that ladies and gentlemen, brings me to an important point, power on Wall Street in concentrated in a few large asset management firms (BlackRock, Fidelity, Vanguard, etc.) and a few elite hedge funds (Citadel, Point72, D.E. Shaw, Two Sigma, Renaissance Technologies, etc.).
And it's they who run the show, the rest of the plebes, including the WallStreetBets crowd are just enjoying the YOLO ride of their life, and admittedly, it's a hell of a ride!
But sooner or later, this nonsense will come to an end and let me explain why.
Wall Street power firms will tolerate mini manias, WallStreetBets and YOLOers as long as they profit from them but the minute they threaten their power and represent an existential risk, it's game over and these powerful firms will quash any insurrection.
There's something else that I'd like everyone to really think of, do you really believe "an army of day-traders" following advice n WallStreetBets was behind the insane volume in the markets this week?
Maybe at the margin but the real movers were large quant funds pumping and dumping stocks that WallStreetBets and others were touting.
Don't get me wrong, GameStop and other stocks were being squeezed but most of the squeezing came from large hedge funds cannibalizing each other, using day-traders as their cover.
Can I prove any of this? No because I don't have access to their books and they're very sophisticated into how they engage in their activity (using derivatives to gamma squeeze, after-hour trading, etc) but there's no way in hell that an army of neophyte traders are taking down Wall Street sharks, get that out of your mind.
And while many are right to point how unfair the system is, it's high time the younger generation wakes up and realizes, the game is rigged, it's always been rigged so the powerful few get a lot wealthier and gain ever more power.
Why am I so cynical? Look at the events over the last year, we had our first global pandemic in over 100 years, the Fed and other central banks pumped trillions into the global financial system, and Wall Street used that money to speculate on risk assets while Main Street sank.
If you want to blame anyone for all these mini manias, blame the Fed, it unleashed this liquidity orgy and it and other central banks around the world are backstopping and promoting this madness.
Whatever you do, please, stop believing the media hype, that an army of neophyte day-traders are taking on the Wall Street machine and winning, that's just nonsense, the financial machine is thriving and gaining power, no thanks to the Fed and other central banks.
Are there abusive trading practices going on? You bet. Hedge funds and other funds shorting and over-shorting stocks, driving companies into oblivion should be fined and stripped of their license but regulators (SEC) turn a blind eye because they're part of the machine.
All this to say, while Rabobank asks whether the Redd-olution is finally over, I'm telling you it never started and everyone who has fallen for the myth that the YOLOs of the world are uniting and sending a chill down the spine of Wall Street's elite, are only deluding themselves.
Powerful hedge funds with an army of coders have already infiltrated the message boards, they are paying for the order flow from Robinhood and care front-running all these trades, shorting stocks that the masses are buying ones which the masses ignore or are too scared to touch.
And keep this in mind, large global pensions and sovereign wealth funds invest in these big hedge funds precisely because they know the game is rigged in their favor.
So, YOLOs of the world, unite, but if you think you're running the show, you're in for a nasty surprise when these elite hedge funds cannibalizing each other pull the plug.
Remember what I said in my Outlook 2021, manage your risk very tightly in these markets or you will get your head handed to you!
Lastly, for all you Robinhoodies who were trading using this App, you've been scammed, it's a platform that steals from the poor and gives to the rich (it's free for a reason!).
Below, CNBC's "Halftime Report" team is joined by Chamath Palihapitiya, CEO of Social Capital, to discuss how he traded GameStop and what he thinks this means for the investment landscape going forward.
Chamath is drinking the Koolaid, perpetuating this myth that the WallStreetBets crowd is a force to be reckoned with.
Next, William Galvin, Massachusetts secretary of state, and Kevin O’Leary, chairman of O’Shares ETFs and co-host of “Shark Tank," joined "Squawk Box" on Friday to debate whether Robinhood was right to take that move.
I agree with Galvin, there's needs to be a lot better regulations on shorting and "gamma squeezing" using derivatives but I don't think there will be a spillover into the broader market unless hedge funds bring the entire market down to kill the WallStreetBets speculators.
Kevin O'Leary is right, these kids trading are going to learn the hard way what speculation is all about, you cannot restrict their trading, let them trade and let them learn by making their won mistakes.
The problem, which O'Leary doesn't address, is that big hedge funds are running the show and a lot of these neophyte traders are being misled thinking they're in control.
Third, CNBC's Brian Sullivan and the Fast Money traders, Steve Grasso, Bonawyn Eison and Barbara Ann Bernard, discuss the market plunge as speculative names get continually bid higher.
Like I said, I don't think this will spill over into the broader market, and if it does, Uncle Powell and the Fed will step in to cool things down. That's the only "revolution" you can count on!
Lastly, it's Friday, the younger generation needs to watch George Carlin to understand the game is rigged, it's always been rigged, the house wins, gamblers lose, and the game will remain rigged as long as the big speculators who own the politicians and the regulators control the purse strings and the game.