The turmoil in parts of the US stock market caused by the WallStreetBets crowd has prompted a veteran US trader to drop his old playbook built up over the decades.
Larry Peruzzi, Head of International Trade at Mischler Financial Group Inc. and more than three decades a market action veteran, said he spends less time looking at fundamental stocks and much more time on tech stuff and in chat rooms.
“We currently look a lot less at the balances and a lot more at the chat rooms, act quickly and try not to use valuation when trading,” said Peruzzi. “It makes no sense, but would we expect a little less in 2020/2021?”
Markets have been rocked over the past week as day traders swarmed over stocks like GameStop Corp. and AMC Entertainment Holdings Inc. hoping to push short sellers out of the market. It worked: Melvin Capital closed its short position and Citron Capital hedged most of its short position with a loss of 100%. That’s got the buzz at places like WallStreetBets new confidence even when the activity is on attract the attention of the Securities and Exchange Commission, among others.
Historically, institutional investors have tended to welcome retailers because they did added liquidity to the markets, Peruzzi said. But now it is causing major trading and liquidity problems, and there is growing speculation that funds could be forced to sell some holdings to meet margin calls, he added.
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For now, there’s a silver lining, at least for the companies whose stocks are boosted by all activity, Peruzzi said.
“Most of these firms are fallen angels and many live on borrowed time,” he said. “The positive thing about all this irrational trading is that if these companies are able to act quickly, additional stock offers could give them much-needed capital to survive.”