With Gamestop stock in freefall, down more than 85% from its all time highs and dragging many of the other most shorted "meme" stocks that soared at the end of January...
... the question on every trader's mind is whether the squeeze (and hedge fund deleveraging) is finally over and is it safe to go back to shorting again?
Addressing this point, JPM strategists published a report overnight in which they note that the most common questions people are asking are “does the de-risking persist?” or“what do we expect going forward?” As JPM explains, it seems likely that we’re through most of the extreme deleveraging, especially among L/S funds, given how much L/S funds de-grossed last week and how negative alpha spreads were. Validating this point, the strategists point to the improving HF returns that are getting reported in the press so far which suggest that there were bright spots within L/S last month, while other strategies generally held up better than L/S. Thus, "the performance risk appears to have been relatively contained despite a couple days of broader pain last week" according to JPM.
That said, not everything has gone right back to the way it was. JPM cautions that while we’ve seen HFs add back to shorts among High SI stocks early this week, "the additions pale in comparison to the large reductions last week." Among Equity L/S funds the % of the North American short book in ETFs has jumped to nearly 18% from under 14% just earlier last month, but it remains below prior highs in recent years. To JPM "this suggests that there’s still room to shift further into ETFs."
Summing up JPM's view, while "the performance rebound likely reduces odds of larger de-risking... that doesn’t mean we couldn’t still see some aftershocks over the next 2-4 weeks given exposure levels (both gross and net) are still quite high, performance is mixed, and the recent events are still very fresh."
To be clear, aftershocks might not have direct impact on broader market returns as it doesn’t seem like HFs are looking to actively reduce directional risk, but it’s not clear that discretionary HF positioning is very “clean” either.
To be sure, while there have been some prominent casualties of the "Reddit rebellion", most notably Melvin Capital which lost more than half of its assets and needed a bailout from Citadel and Point72 and short-seller Citron whose founder Andrew Left last week said that he would not longer pitch short ideas, Bloomberg reports that most hedge funds are "hunting for frothy names to short, even after GameStop":
On the short side, they’re targeting some of last year’s best performers -- those with businesses that will be less robust once people return to their pre-pandemic routines -- as well as industries that may languish because of altered consumer tastes or habits, such as movie-theater operators like AMC.
That said, having fully realized how powerful a coordinated trading effort among its record 8.5 million members could be, the WallStreetBets crowd is unlikely to give up trying to find the next most negatively convex catalyst, by which we mean "inflict the most pain on the professional investing community", and sure enough while attention may have drifted away from Gamestop and AMC, daytraders are now flocking to other, less liquid, corners of the stock market such as small drug developers and pennystocks, just as we expected would happen last week...
What's after the short squeeze slaughter: the pennystock pump?— zerohedge (@zerohedge) January 30, 2021
... as a result microcap stonks are soaring while the "most shorted" names are tumbling
As Redditors now use Reddit mostly as a message board on which to coordinate where the next buying spree will strike, they have sparked rallies in micro cap names such as Anavex Life Sciences, Cassava Sciences and MannKind Corp. The gains show that Reddit is continuing to “play a major role in trading action” for single stocks, wrote Jared Holz, a Jefferies health-care equity strategist.
There's also the fact that it is only a matter of weeks before millions of reddit traders receive another check to the tune of (roughly) $1,400 which they can use to ramp up a whole new batch of names, once the latest Biden fiscal stimulus passes some time in late March/early April.
Yet while the next "reddit ramp" is just a matter of time, we expect the sophisticated traders behind these ramps to dig deeper and ignore the lowest hanging fruit. After all, it took just a 2 minutes stock screen to find the most shorted stocks - we doubt that strategist will work again.
So what may work?
Considering the negative publicity hedge funds have gotten in recent weeks and considering that quite a few of them still remain very short a handful of "idea dinner" stocks - which however are not quite as popular and have not be listed among the top 30 most-shorted Russell 3000 stocks - we thought that the next logical place would be to look at which companies have been targeted in the recent past by prominent short sellers (while they are still around because if Citron's example is copied, soon there will be no public short reports) such as Muddy Waters, Citron, Kerrisdale, Hindenburg Research, Grizzly Research, Blue Orca and hedge funds themselves (as disclosed in their periodic letters to clients) and where there has been a pileup of similarly bearish hedge funds, and where rolling short squeezes could happen next.
And while readers are always encouraged to do their homework and go through recent hedge fund letters and "short" research reports on their own (which our professional subscribers have access to), below we have done some of the legwork and looked at some of the more popular short as disclosed in investing these and hedge fund letters published since Q3 2020. The result, sorted by ascending market cap, are presented below.