Robinhood day traders are squeezing the hedge funds — here’s why it may continue

by Warrior2

As the saying goes, the market can remain irrational longer than you can remain solvent. And what is happening now is that the big players are being pushed around — David bullying Goliath, if you will — by the legions of day traders, using services including the Robinhood investing app to drive stocks higher.

That is the theory put forward by Michael Batnick, director of research at Ritholtz Wealth Management and author of the Irrelevant Investor blog. “These traders are moving from stock to stock. They squeeze all the juice until there’s nothing left and then move onto the next one,” says Batnick.

He points to this chart from JPMorgan showing the most shorted companies in the Russell 300 RUA, +0.85% surging higher. “I can’t prove that the digital traders are the culprits, but I don’t think it takes a titanic sized leap of faith to make the connection,” he said.

Batnick included this viral video of a young couple sharing their investing strategy on TikTok. (If you don’t click on the link, the man says he buys stocks when they start going up and sells when they stop doing so. Momentum trading, in other words.)

What’s different this time? The networking effect. “This is a gigantic community now, and if we’ve learned anything over the last decade, it’s that we should be careful shorting networks. There are nonmonetary considerations at play here, like belonging. And fun. Did I mention they’re having fun?” says Batnick. “I don’t think these people can continue to make money forever, but this idea that it ends with them going away is not something I see coming.”

The buzz

Supreme Court Chief Justice John Roberts will swear in Joe Biden as the 46th president of the United States. The inauguration will be a lower-key affair due to the COVID-19 pandemic, with some 200,000 flags replacing people on the National Mall. Vice President Mike Pence will represent the departing administration. Biden also announced a raft of first-day executive actions he will take, including rejoining the Paris climate accord and the World Health Organization, and stopping the construction of the U.S.-Mexico border wall.

In one of his last acts in office, President Donald Trump pardoned 73 and commuted the sentences of 70, including former adviser Stephen Bannon, Republican fundraiser Elliott Broidy, and rappers Lil Wayne and Kodak Black. From the business world, Anthony Levandowski was pardoned after stealing trade secrets from technology giant Google’s GOOG, +3.15% self-driving program, as was Gregory Reyes, the former chief executive of Brocade Communications, who was the first to be convicted of illegal stock options backdating.

Notably absent from Trump’s list was any member of his family. Joe Exotic, the star of the Netflix series Tiger King, also wasn’t pardoned, after hiring a limousine in anticipation of being released from prison.

Netflix NFLX, +0.76% shares jumped 14% in premarket trade after the streaming service reported 8.5 million new subscribers in the fourth quarter and said it will no longer need to finance programming from debt. Consumer products giant Procter & Gamble PG, -0.88% topped earnings estimates, as Morgan Stanley MS, -0.33% wrapped up earnings season for the Wall Street banks by beating estimates on both top and bottom lines.

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Internet giant Alibaba BABA, +3.36% 9988, +8.52% rose in Hong Kong trade after founder Jack Ma made his first public appearance, at a charity event, since his run-in with Chinese authorities over the cancellation of the Ant Financial initial public offering.

Tesla TSLA, +2.23% rose as Oppenheimer reportedly raised its price target on the electric car maker to $1,036.

Short selling research firm Citron Research is holding a presentation on videogame retailer GameStop GME, +10.87%, which has doubled in price in 2021. In a tweet, Citron said buyers of GameStop at this level “are suckers at this poker game.”

The markets

U.S. stock futures ES00, 0.60% were pointing to a stronger start, with the tech-heavy Nasdaq-100 NQ00, 1.08% contract leading the way.

The yield on the 10-year Treasury TMUBMUSD10Y, 1.101% was 1.10%.

The chart

Ned Davis, the senior investment strategist of his eponymous Ned Davis Research, says the market looks bubbly but that the ride up will still continue. The percentage of stocks making weekly new highs has risen, while the percentage of stocks making new lows has remained low, he said. Historically, new highs peak 36.5 weeks before the market does. He does agree the market looks extended relative to its long-term trend. But it isn’t as extended as 1929 or 2000, he says.

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