| The Weekend Edition is pulled from the daily Stansberry Digest. Market 'Froth' Is a Tell-Tale Sign of a Melt Up By Corey McLaughlin We begin today with yet another example of the current market euphoria... In brief, it looks like at least hundreds of aggressive day traders – using online message-board site Reddit to communicate – have fueled a few epic "short squeezes" against Wall Street hedge funds that were betting against specific stocks. For example, take a look at the price action of mostly forgotten video-game retailer GameStop (GME) or BlackBerry (BB), the maker of the once-ubiquitous handheld devices, over the past couple of weeks. It isn't hard to see what we mean, first with GameStop... And then, with BlackBerry... These stocks, and a handful of others, experienced triple-digit gains in a short span for seemingly no reason. No reason, that is, except for what's happening on the "WallStreetBets" section of Reddit's website... This story involves a lot of angles that speak to Wall Street and Main Street euphoria, angst, and greed – and some entertainment value, too, for the wiser among us who know not to get directly involved. But the long and short of it is this... WallStreetBets kicked off an online frenzy urging people to buy call options on certain left-for-dead stocks and "take it" to those folks on Wall Street who are short those stocks... And it caught on big time. The result has been a few crowd-driven "short squeezes" that will be talked about for years in investing circles... A short squeeze isn't a new concept, of course. It's when bearish investors, betting that the price of a particular asset will be lower in the future, are squeezed into running for the exits and cover their trade when prices instead go higher. But the public and brash nature of these bets have gotten the attention of the Wall Street pros, the mainstream media, and regulators... We won't get into all the minutiae in today's essay. Just know that WallStreetBets is a corner of the Internet populated by folks with reputations for looking to make quick, "easy" money... We're not telling you to join them... not by a long shot. First off, if there was easy money to be made betting big on stocks like GameStop and BlackBerry, it already has been made. And more important, the bigger point for longer-term investors is this... | Recommended Link: | | 'Make this ONE move before February 5'
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Whatever you hear about this story, know that it's another sign of the "Melt Up" at work... The "froth" in today's market – especially among retail investors, like those frequenting the WallStreetBets message board – is clear and present. We're talking, of course, about the main conditions of the market today... where you have an abundance of cheap dollars and nowhere else to make money with them. An army of day traders pushing the asset prices of a few companies higher by buying call options in large amounts is simply a manifestation of these themes... We wonder what the Federal Reserve thinks. Amid all the talk about WallStreetBets today, we can't help but think back to late 2019. Our colleague Jeff Havenstein, an analyst on Dr. David "Doc" Eifrig's team, wrote about the community and its effects in the December 12, 2019 Stansberry Digest, the last time stocks were shooting higher and higher with seemingly no end in sight... If you've never heard of the online message board WallStreetBets, it's worth a visit... The site, hosted on the popular news aggregator and discussion website Reddit, has become a home for investors who make risky bets, and want to share information and opinions about them. The message board is a collection of investment tips, bragging, quite a few memes, and of course... overconfident young traders. Today, these WallStreetBets traders sound like they're trying to teach certain hedge funds a lesson... And frankly, it seems like they've done it – at least to some degree. No doubt, a handful of traders have made a lot of money by learning which stocks the hedge funds are short on... and pushing prices higher as a large enough group. A few WallStreetBets users posted that they've turned tens of thousands of dollars into multimillions on just one options position... And on the other end of this trade, some institutional investors have lost large amounts of money. For example, Melvin Capital Management is one of the largest hedge funds in the world. It was short GameStop before the WallStreetBets community unleashed its swarm... As a result, Melvin Capital reportedly suffered a 30% loss in the first 15 trading days of 2021, forcing it to essentially be bailed out on Monday by fellow asset-management firms Citadel and Point72 with a $2.75 billion investment. The whole story has made for some lively discussion amongst a few of our editors. As our Director of Research Austin Root put it in a private e-mail earlier this week... This is one of the craziest things I've seen. I remember back to the Porsche-Volkswagen short squeeze [in 2008] and all the folks that lost money there. This is probably worse for a bunch of small hedge funds. This short-squeezing serves as a cautionary tale for individual investors like us... You want to have a trusted guide to follow whenever you're shorting companies. It also raises the question, "Is this a fraudulent pump-and-dump scheme?"... Bloomberg columnist Matt Levine addressed this topic in great detail in his daily newsletter on Tuesday. Levine leans toward "no" for a few reasons... including that the calls to bet on GameStop were done in a public forum. So hedge funds could've seen them and adjusted their positions. In any case, the retail investor euphoria is obvious... And it has been for months. While "nutty" is an accurate word to describe the pandemic market, we do see an important difference in today's market compared to a few months ago... Back in September, we saw higher "fear" in the market – as measured by the popular CBOE Volatility Index ("VIX"), which gauges the bullish or bearish sentiment of traders. In the last several weeks, as we wrote on Tuesday, this "fear gauge" had been much lower than it had been for most of the past 12 months. But it was still higher than the VIX's three-decade average of roughly 17. We said that meant it was time for contrarian investors to pay attention... The very next day, amid the GameStop saga, the VIX spiked above 30 and did so again on Friday, all the way up to 33. At the same time, Wall Street traders have been getting more bullish over the past few months. As Steve wrote in DailyWealth on January 5... According to Citigroup, overall euphoria is at its highest level since the early 2000s. That's according to the company's Panic/Euphoria Composite Index, which looks at factors like margin debt and options trading. It shows dramatically higher euphoria than we ever saw during the 11-year bull market. And it's nearing 20-year highs, too. Simply put, everyone's bullish. And they're behaving accordingly. Professional investors are following suit. The Bank of America Merrill Lynch Global Fund Manager Survey from December shows it clearly... It surveys a few hundred money managers to get their take on the markets each month. These professional money managers are now underweight cash for the first time since 2013. This is why Steve and many others at Stansberry are becoming more cautious on U.S. stocks today... We've mentioned this a handful of times over the past two weeks alone... And you can add this WallStreetBets "takedown" of short-sellers as another example. It's a tell-tale sign of a Melt Up. As Steve wrote in this month's True Wealth issue... Twentysomethings are trading tech stocks on their phones. They're buying cryptocurrencies. They're speculating – in a way I haven't seen since, well, the last U.S. Melt Up in 1999. Is it some fundamental change to our economy that's driving them to buy already-expensive stocks? No. It's far simpler than that. Animal spirits have kicked in among investors. "FOMO" is here – fear of missing out. That's it. This can be a dangerous yet entirely human emotion to get caught up in. And it's easy to get burned by succumbing to it... to get on and off the "good times" train at exactly the worst times... As Steve says, today's market is dangerous for one simple reason. While times are good right now, we know what always happens next... After a furious Melt Up, the market will endure a crushing "Melt Down." So we can't say it enough... Make sure you have a plan in place NOW for what you will do when the music stops... when WallStreetBets goes quiet again... and when the short squeezes no longer work. All the best, Corey McLaughlin Editor's note: Steve, Doc, and Austin just held their "2021 preview" event to share their thoughts on where the market's headed from here. They discussed the Melt Up... their top stock picks... and the best ways to navigate the frothy market today. If you missed the event, you can catch a replay for a limited time right here. Tell us what you think of this content We value our subscribers’ feedback. 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