GameStop update – Melvin Capital out

Having spent most of the first part of the morning wrestling with Microsoft systems to get into the matrix, we are seeing some serious funny business in some corners of the market. My earlier note talked about the problems with the whole Reddit /r/wallstreetbets thing, and how it clearly needs to be looked at by the SEC because large numbers of retail traders will get hurt as a result. Since then shares have gone ballistic in pre-market trading: GME +100%, AMC +110%.

It’s been reported that Melvin Capital has been closed out of its short position in GME as of Tuesday morning – this could be a turn as the short covering has been a key driver of the price action. If there are no shorts left to target, it could be the moment for the dump after the pump. Having said that, the dealer gamma squeeze is also to be considered and may allow for further upside on the stock.

We are also seeing some interesting activity in the UK, where heavily shorted shares like Pearson and Cineworld are off to a flyer. I would be careful about seeing this as a case of the Reddit crowd finding new targets right now. It is likely down to short covering as hedge funds back out of their positions in light of what has happened to heavily shorted stocks like GME. This is very much about managing risk. Given the situation across the pond vis-à-vis Merlin, I would think all hedge funds are taking a good hard look at all their short positions and deciding whether they are worth it. Shorting can result in potentially infinite losses, so the risk management is always against you if the flows are there from buyers. As a result of the short covering, or rather in anticipation of it, some traders (maybe some on Reddit, who knows?) may be front-running and contributing to the pump.

We are seeing increased interest in a number of the names most associated with the /r/wallstreetbets trades, including GME, NOK, BB, BBY, AMC, PBI. I would exercise extreme caution around these since the price action is proving to be exceptionally volatile.