Here’s the crazy chart of the week:
Gamestop is a brick-and-mortar store that sells new and used video games and console gaming systems. The stock has been trending down since 2013, hitting a low around $3.32/share in August 2019 – months before the pandemic. This followed the trend of many brick-and-mortar stores vs online competition, as hard copies of new and used games are sold on sites like Amazon and Ebay while console providers like Playstation and Microsoft were selling new games for direct download to their consoles.
With the pandemic lockdowns, there was serious speculation about Gamestop going bankrupt, and short sellers piled in. You can see on the table above (link here: GME Short Interest Ratio (GameStop) | MarketBeat ) how the dollar value sold short was skyrocketing, from 54,520,000 shares sold short on 7/31 at $4.60 a share to 71,200,000 shares sold short on Jan 23, 2021 (I had to find today’s number here: GME – Short Squeeze Stock Short Interest for Gamestop Corporation Class A ).
Another way of seeing this, the company’s market cap valuation (total shares x share price) went from $470 million in July as bankruptcy fears loomed to $6,650 million today. The stock even peaked above $75/share, significantly eclipsing it’s all-time high in 2008 of around $62.50.
Anyway, this is a classic short squeeze. It’s rare that you see one this violent, but it shows you one of the reasons that it’s never a good idea to sell stocks short. Selling short is a leveraged bet with a significant possibility of sinking your entire account. Imagine paying to borrow shares to sell on the market at $4.60/share because you think bankruptcy is inevitable. The higher the stock rises, the more it draws on margin (borrowed money from the broker) until your account hits it’s limit and you are forced to buy back in and close out the trade. New short sellers are coming in at higher dollar amounts because they know this valuation can’t last – so you see the number of shares sold short continue rising – but those who sold short lower are forced to buy back and speculators come in betting that the share price is squeezed higher.
It’s an amazing sight, and it is why I stick with put contracts if I want to bet on the downside. For the Russell 2000, I have been betting significant amounts of money at every leg higher by purchasing long-dated contracts with the rights to sell shares at a given price. The difference here is that I have no obligation to sell the shares, so the contract value stays above zero until it runs out of time completely and then disappears at zero. It is called a hedge because I expect my portfolio to outperform significantly enough to more than make up for these costs, unless the drop I fear occurs in which case these put contracts will somewhat cushion my portfolio losses.
Here’s where my portfolio landed:
- PRECIOUS METALS
- 26.7% Gold Miner Stocks, Large
- 16.4% Gold Miner Calls, Large
- 13.9% EQX (small gold miner stock)
- 1.7% PVG Calls (small gold miner)
- 2.2% SAND Calls (small gold streamer)
- 9.3% SLV Calls (silver ETF)
- 5.8% TLT Calls
- 8.4% IWM Puts
- 2.5% EEM Puts
- 0.7% CCJ Calls
- 12.5% Unallocated cash
The only moves I actually made this week were adding some EEM calls and CCJ calls. I still like being long Uranium and I will likely increase this position if the price dips further. On the other hand, I don’t want to be too aggressive when there are so many potential warnings of a market top.
Here’s a good example: Looking Deeper at the NAAIM Survey Data | Top Advisors Corner | StockCharts.com
The article goes over data compiled by the National Association of Active Investment Managers, showing their responses and positions. The average manager is invested 113%, meaning a leveraged long position in the stock market. The most bearish manager is at a 75% long position. None of them can afford to be short or even neutral at this point or they’ll risk losing clients. Remember that a professional investment manager plays a game involving relative performance; they can risk their funds losing money along with their peers, but they can’t risk underperformance when everyone else gains.
My current bias is bearish, as I expect a pullback on everything including precious metals. However, I really don’t want to decrease my positioning in them for two reasons. First, I expect precious metals and Cameco (Uranium) to perform well over the next 2 years. Second, I could be wrong about the pullback – and if this is the case, then I need to be long enough to make up for my hedges losing value.
We are at a period of high volatility at somewhat suppressed prices, so it actually makes sense to hedge risky upside positions with risky downside positions rather than sit on the sidelines. In the next few months, the market is much more likely to be either up more than 10% or down more than 10% than ranging in between.