We don't get stories like this often...
A Wall Street Goliath just got its butt kicked. But this time our David is a little... well, different.
You've probably already seen the headlines. Members of the Reddit forum WallStreetBets have pumped up video-game retailer GameStop's (GME) stock to ridiculous heights. And in doing so, they crushed a famous short seller.
In other words, a gang of kooky traders blew up what looked like a "sure bet." And Goliath didn't see them coming.
Now obviously, the mainstream media has had a field day with this. And for good reason. This is a highly unusual story.
Don't let the reporting frenzy fool you, though. This is more than just a sideshow event.
This is a Melt Up story. And you need to understand it to navigate today's market.
Let's get started...
If you feel like the market is getting frothy, it's not just you. The pandemic-driven narrative of "bored traders stuck at home" is no joke.
In 2019, trading firm Citadel Securities estimated that retail traders accounted for roughly 10% of market activity. By July 2020, that number had jumped to 25%.
This is what it looks like when a Melt Up gets rolling. Retail traders pile in. And they're not just sitting on index funds.
These traders are moving real money. Trading volume is up over 100% from 2019 levels.
Once you realize this, it isn't so surprising that a band of kooks took down a Goliath. Retail traders now have the numbers and the power to move the market.
In the case of GameStop, traders went after a highly shorted stock. The company was one of the most highly shorted in the U.S. Famed short seller Andrew Left of Citron Research was vocal about his position. And another highly regarded hedge fund, Melvin Capital, was short as well.
So these kooks went after them, buying the stock in droves. That pushed the price higher and initiated a short squeeze.
That happens when a highly shorted stock rises quickly, forcing the short sellers to cover their positions (which means buying shares)... which causes the stock to rise even more. It's a painful cycle for anyone betting prices will fall.
The stock closed at $43 a share last Thursday. It's traded well above $300 a share this week. And this is a company that any rational investor knows has a grim long-term future. It has suffered for years as e-commerce companies like Amazon took over.
GameStop is just the latest example, though. Regular readers may remember that I covered similar retail-investor pile-ins in JC Penney and Hertz Global.
In those instances, traders piled into companies that were about to declare bankruptcy. And in both cases, the stocks jumped up before ultimately collapsing.
Now, it might seem crazy. But this is exactly the kind of behavior you'd expect to see in a Melt Up. These events have all the markings of retail euphoria.
That's the whole idea of the Melt Up thesis. So don't let it scare you off.
Instead, remember these key Melt Up characteristics in 2021...
- Retail-trading fervor is to be expected. And it can last longer than you think.
- Volatility is normal. You should expect the market to move erratically. And don't be surprised by wild swings in retail favorite hot stocks.
- Lastly, corrections are normal too. The Nasdaq fell by roughly 10% five separate times before the ultimate peak of the dot-com boom.
Folks, this is what a Melt Up looks like. All of our data says that the market is primed to keep soaring from here.
From here on out, expect to spot these Melt Up characteristics regularly. And don't be surprised when a band of kooks pulls off another trading stunt.
These are the conditions we're living in. It's time to make the most of them.
Good investing,
Vic Lederman
P.S. If you want to "thread the needle" and ride today's Melt Up with minimal risk, you'll want to hear what Steve and our colleagues are saying about the state of today's market... and the kooky behavior we're seeing. You'll also learn some of their favorite stock ideas right now, and a new way you could beat the market in 2021. Check out their recent broadcast right here.
Further Reading
You probably don't look at the stock market as a place to gamble. But the type of traders dominating the headlines lately sure do. And it's a major indicator that we're in the midst of the Melt Up... Check out Steve's two-part essay about how to profit from this craze here and here.
"It makes sense to be a little worried about the market today," Dr. David "Doc" Eifrig writes. Every bull market eventually takes a breather. But this simple metric shows us that the stock market is still healthy today... Get the full story here: The Bull Market Is Still Healthy... But Expect Volatility.
The market antics we're seeing today will come and go. But if you want to generate long-term wealth as an investor, follow this time-tested way to invest...
THE PANDEMIC IS BOOSTING DEMAND FOR THIS FROZEN-FOODS GIANT
Today, we're looking at a company that's "selling the basics"...
Regular readers know we're always on the lookout for companies that sell everyday items. It may not be flashy, but selling consumable products like soda and cereal is a winning long-term strategy. And as folks have loaded up on snacks and food to get through this pandemic, this business has benefited...
Nomad Foods (NOMD) is Europe's leading frozen-foods company. It boasts popular brands such as Birds Eye, Aunt Bessie's, and Findus. These are the kinds of staples that people make sure they never run out of. And demand has increased during the pandemic as more folks eat at home... Nomad Foods reported that its third-quarter revenue jumped nearly 7% to $698 million, noting the possibility of another demand spike as COVID-19 cases rise across Europe.
As you can see in today's chart, NOMD shares are up more than 70% from last year's mid-March lows... And they recently hit a fresh all-time high. As people continue stocking up on frozen foods, this trend should continue...
