A glance at my screens this morning revealed another welcome sea of green for the major share market indexes in Europe and the United States.
In the US, the Dow Jones Industrial Average (DJX: .DJI) led the charge higher closing up 1.57%. That was just enough to edge out the 1.56% gains of the tech-heavy Nasdaq Composite (NASDAQ: .IXIC).
Australia's share markets are following their overseas peers' lead, enjoying another positive day. The S&P/ASX 200 Index (ASX: XJO) is up 1.1% in afternoon trading, bringing this week's gains to 3.6% so far.
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Stimulus versus coronavirus
In the ongoing battle between coronavirus and massive government stimulus packages, stimulus appears to be in the driver's seat, boosting investor sentiment.
News on the pandemic front is mixed.
On the positive side, more than 100 million people have now been vaccinated around the world. And new infection numbers in the virus-ravaged US were down again last week, the third weekly decline in a row.
On the negative side, the COVID variant in the United Kingdom is beginning to mimic the mutations of the South African variant. That strain has proven significantly more resistant to existing vaccines, which could stall the global reopening and economic growth outlook.
However, investor optimism has been stirred by the massive US$1.9 trillion (AU$2.5 trillion) COVID-19 relief package spruiked by President Joe Biden.
That stimulus package is more than double the Republicans' counter offer. But the Republicans may not be able to stop its passage. Senate Majority Leader Chuck Schumer, a Democrat, said the Senate will soon commence a process to enable passage of the relief package without Republican support.
Also buoying investor sentiment is the apparent early demise of the Reddit army's market rattling influence.
The Reddit army's Waterloo moment
There was a time when Napoleon Bonaparte appeared unstoppable. As the Emperor of France from 1804–1815, his armies swept across much of continental Europe. He was, without a doubt, the most disruptive force of his time.
Then came Waterloo, a small town in what's now Belgium. The Battle of Waterloo would be his last.
The Reddit army, the collective of retail investors linked through Reddit's WallStreetBets, emerged only a few weeks ago as its own highly disruptive force. At least as far as share markets and hedge funds are concerned.
Targeting institutional short sellers (mainly hedge funds betting against a company's share price), the group of retail investors drove the price of a handful of highly shorted shares through the roof.
Gaming vendor GameStop Corp (NYSE: GME) drew some of the most investor interest and media attention. The GameStop share price peaked last Wednesday 27 January at a record high of US$347.51. That represented an eye-popping 1,915% gain in 2021.
But in a sign the Reddit army looks to be having its own Waterloo moment, the GameStop share price has crashed 74% since last Wednesday's close. Shares plummeted 60% yesterday (overnight Aussie time) alone. And GameStop's share price is down another 5% in afterhours trading. Though, mind you, that's still up 394% in 2021.
Movie and entertainment company AMC Entertainment Holdings Inc (NYSE: AMC) was another highly shorted share the Reddit army sought to 'rescue'. Last Wednesday the AMC Entertainment share price surged 301%. Yep, in one day
Since that high, AMC shares have lost 61%, dropping 41% yesterday. Despite the big retreat, for 2021 the AMC share price remains up 289%.
Even ASX-listed Unibail-Rodamco-Westfield (ASX: URW) shares got caught up in the action, via the company's links to its European-listed shares which had been highly shorted. Last Thursday, shares of the retail landlord leapt 15% higher as the Reddit army took aim.
With a much smaller surge in its share price, Unibail has held up better with the Reddit army's pullback, down 4% this week.
The massive losses in recent days for shares like AMC Entertainment and GameStop will come as bad news for investors arriving late to the party. But Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, points out that more broadly, investors will be relieved (quoted by Bloomberg):
There's optimism brewing underneath. The fact that markets have cooled down a bit with the retail-trading frenzy, that's giving a little bit of optimism. Anytime there's more stability to markets, there's a breath of relief of all investors.
The Reddit army's Waterloo moment won't come as a surprise to Mark Taylor, a sales trader at Mirabaud Securities. According to Taylor:
The short squeeze momentum met its inevitable end. It seems reasonably clear that as the cheerleading and rage against the machine dies down, the man on the street is left holding the bag again.
Personally, I watched the extraordinary share price surges in some of the shares targeted by the Reddit army from a safe distance.
Sure, the daily gains of several hundred percent were appealing. But so is watching someone win big in the casinos.
To me it's like letting your roulette chips ride on black in hopes of doubling your money over and over. As Mirabaud Securities' Taylor said in the quote above, that kind of investment philosophy is destined to meet its inevitable end.
