GameStop Short Covering Is Not Responsible For The Markets Falling Last Week

GameSto GME p has been highly visible the past few weeks, as its stock has skyrocketed over 1,500% since Tuesday, January 12. Its market cap has increased from $1.4 billion to almost $23 billion as of Friday, January 29, which has caused major losses for investors who had shorted GameStop shares.

While they have pulled back some from their all-time highs on Wednesday or Thursday, there have been other stocks that have caught investor and non-investor attention. AMC Entertainment or AMC Theatres, BlackBerry and Koss are a few of the more visible ones. With BlackBerry only moving higher by 85% in the past two plus weeks, AMC and Koss have increased by 479% and 1,875%, respectively.

While these are spectacular, eye-catching moves in such a short period of time, the buying of these stocks by investors covering their short positions is not the reason the overall market (S&P 500 down 3.4% and the Nasdaq NDAQ down 3.6%) fell.

Market caps just aren’t big enough

Every day market pundits have various reasons why the stock markets move up or down or remain fairly flat. The reasons talked about the most often are new economic numbers, what the Fed is doing or not doing, what politicians are doing or more likely not doing or the latest reason du jour.

The past two weeks the latest one is GameStop, Reddit’s WallStreetBets thread and shorts having to cover a massively large position. While this is definitely newsworthy, GameStop’s and these other company’s market caps aren’t big enough to have impacted the markets all by themselves. At some point in time, probably sooner rather than later, these stocks will come back down to earth and will be a blip on the historical stock market radar screen.

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GameStop is by far the stock that has seen its market cap increase by the greatest amount. Since the end of last year these are a few days with its value.

  • December 31, 2020: $1.3 billion
  • January 12, 2021: $1.4 billion
  • January 13, 2021: $2.2 billion (first big rise in the stock)
  • January 22, 2021: $4.5 billion (up 226% since January 12)
  • January 29, 2021: $22.7 billion (up 1,529% since January 12)

Between January 12 and 29 GameStop’s market cap increased by $21.3 billion and in the last week it rose $18.2 billion. The second largest value gainer of these other visible stocks was AMC, but it only saw its market cap rise by $2.8 billion.

While GameStop’s increase was a huge amount, it pales in comparison to some of the mega-cap tech stocks moves last week.

  • Amazon AMZN : Down $133 billion
  • Apple AAPL : Down $122 billion
  • Google: Down $40 billion
  • Facebook: Down $39 billion
  • Total: Down $334 billion

Microsoft MSFT was the only FAAMG stock to see its value rise in the past week, increasing by $45 billion.

Even if the FAAMG stocks were the only ones short sellers used to raise cash, the downturn in their value was over 13 times larger than GameStop’s rise.

And using Apple’s trading volume, and therefore the value of shares traded, using an average daily volume of 143 million shares at $140 per share there was over $20 billion in Apple stock traded every day last week. The other FAAMG stocks would have also been able to raise billions of dollars to cover GameStop purchases without having a major impact to the market.

De-risking was probably the major reason

The stock market has done well over the past 12 years through the President Obama and Trump administrations and the beginning of Biden’s. However, when what appears to be a new phenomenon comes into the picture, such as the Reddit Raiders, portfolio managers tend to step back a bit to access the situation and their exposure.

This is especially true of investment vehicles that are both long and short the market. In this case, funds that have short positions, especially if they are in other crowded trades, have probably covered at least some of them. This then “forces” the portfolio manager to decrease their long positions if they want to maintain the same dollar ratio between their long and short positions.

One way to visualize the level of risk in the stock markets is via the VIX or Volatility Index. It has spiked up the last three days and while it is not close to all-time highs it has definitely caught portfolio managers attention.

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