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Stock Market Feels The Squeeze

Jeremy Lutz - MarketClub

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The DOW dropped more than 600 pts Friday to finish January with its worst week since October losing over -3.2%. The S&P 500 and NASDAQ couldn't avoid a selloff, with both indexes losing -3.3% and -3.4%, respectively. The reason for the losses, a short squeeze of all short squeezes. 

It started on January 25th when a group of retail investors identified GameStop Corp (GME) as a buy on the WallStreetBets Reddit forum. This group of day traders continued to encourage each other to pile into GameStop's shares and call options, creating a massive short squeeze that inflicted pain for hedge funds betting against the stock. So much so that the trading app, Robinhood, seized trading mid-week of GME stock as well as several other stocks. After resuming trading Thursday, Robinhood has been limiting the number of shares that the retail investor can purchase. 

All told, the short-selling hedge funds have suffered a loss of nearly 20 billion year to date, including a nearly $8 billion loss on Friday as the GME kept ripping higher. Still, short-sellers mostly are holding onto their bearish positions, or they are being replaced by new hedge funds willing to bet against the stock. GameStop shares that have been borrowed and sold short have declined by just about 5 million over the last week, marking an 8% dip in the short interest, according to S3. Most of the short-covering occurred on Thursday when the stock fell for the first time in six days, according to data from S3 Partners.

Meanwhile, the traders on the WallStreetBets Reddit forum are preaching to hold the line and to not sell, which they see as giving in/losing to the hedge funds. It should make for an interesting time next week. Other stocks on their radar are Nokia (NOK), AMC Entertainment Holdings, Inc (AMC), Koss Corp (KOSS), Express, Inc (EXPR), and BlackBerry Ltd (BB).

Of note, the DOW and S&P 500 have both gone negative for the year, with January losses standing at -2% and -1%. The NASDAQ, on the other hand, is holding strong with a monthly gain of +1.4%. 

Key Levels To Next Week:

S&P 500 (CME:SP500): 3,694.12
Dow (INDEX:DJI): 31,272.22
NASDAQ (NASDAQ:COMP): 12,949.76
U.S. Dollar (ICE:DX): 89.92
Gold (NYMEX:GC.J21): 1,835.60
Crude Oil (NYMEX:CL.H21): 51.93
Bitcoin (BITCOIN:BITSTAMPUSD): 28,800.00

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