Swissquote Bank: It takes an army to fight back Wall Street

2 februari 2021

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Major stock indices brushed off last week’s pessimism and recorded a strong rebound on Monday.

In the dearth of a plausible explanation, Monday’s stock rally was put on the back of investors getting comfortable with the idea that the short squeeze on small caps won’t interfere with the appetite in big stocks and that, there is enough liquidity in the market to allow all shares co-flourish at the same time.

As such, most of European indices closed above 1%. Nasdaq surged 2.55% before the earnings announcement from two other giants of the tech industry: Amazon and Google. And the S&P500 recorded the biggest one-day rally in about ten weeks – after having plunged by most since October.

The deepest plunge in weeks, followed by the biggest jump in weeks is not a good sign of stability nor a healthy investor sentiment. It is rather a sign of a mounting stress and the possibility for more market turmoil in the close future. The VIX, which is a gauge of market volatility has topped to the highest levels since November.

Volatility is bad, whether it’s on the upside or on the downside. Therefore, gains remain on a slippery ground before we see any setback in market swings.

European markets are set for a positive open, consolidation of gains and a calmer session is exactly what investors need to get over the short-squeeze frenzy.

Speaking of short squeeze, the Reddit r/wallstreetbets army is now leaving the company to its own destiny after having pulled the short interest from 114% to 39% in a month. The GameStop shares plunged 30% on Monday and another 35% in the after trading. So, even if the open short interest remains solid, the faiding momentum could prevent another large move to the upside. On the other hand, going short on GameStop shares would demand very solid nerves, which would prevent the stock from plummeting by more than necessary.

So, the punchline of the GameStop story is certainly a significant setback in its share price. We will unlikely talk about GameStop shares in a longtime, but the chances are, we will see a parade of similar, heavily shorted company shares - which have a somewhat promising business plan and favorable technicals, pulling their heads above water in a single move. 

As such, recent hours saw two heavily shorted biotech stocks soar: BioCryst Pharmaceuticals and Inovio which surged 40% and 33% respectively.

Whether we can see a similiar rush in European stocks in big difficulty is unsure. Finding heavily shorted stocks is not enough to create such a large short squeeze; there also needs to be a platform with a large-enough follower base and a broad co-speculation potential to trigger a GameStop-like market impact. It takes an army to fight back Wall Street.

Back to big fish, the leading tech companies still continue making their investors dream, with solid earnings they post quarter after quarter amid their pandemic-boosted businesses. Last week, we have seen amazing performance from Facebook, Microsoft and Apple. Today, Amazon and Alphabet will report earnings after the market close and are expected to have had a good quarter as well.

Amazon is surfing on the skyrocketing e-commerce sales as we stay home and buy online. By December last year, Amazon earned $4,722 each second, $283,000 each minute and an average of more than $17 million each hour. 

Alphabet on the other hand is expected to post the strongest revenue over the past four quarters and a boost in its cloud revenue. Analysts predict revenue growth of 15.7% YOY for for the fourth quarter of 2020, its strongest performance during 2020 but still a bit dull compared to 17.3% YOY growth recorded on the fourth quarter of 2019.

Now it’s worth noting that we are in a period where good earnings lead to gains in the stock markets. This is not always the case, if investors believe that the earnings announcement is a trigger to take their profit and walk away. But given the huge amount of cheap cash in the market, and the promise of having more, there is little to stop investors from craving more right now.

Elsewhere, the Bitcoin’s price soared to $38’000 last Friday as Elon Musk said that the cryptocurrency is ‘ on the verge of borad acceptance’ and stablized near 34000. There is no doubt that Bitcoin is now an asset that everyone had heard of and it will have the value that the general public attributes to it.

Should you buy Bitcoin at the current prices is another story. Bitcoin is a market where the underyling price drivers remain uncertain and the price volatility is too high for it to become a medium of exchange, as it name indicates. One should have guts to spend Bitcoin in exchange of a pizza, knowing that there is a possibility of its price surging 600% over the next twelve months.

In the FX, the euro bears are working hard to clear support within the 1.20/1.21 area against the US dollar. The next serious battle will likely be fought near the 1.20 mark.

Gold gives back its past three-session gains as investor show a better appetite in risk assets, and the prospect of an increased flow to big equities with the announcement of most-promising companies’  earnings.

Oil broke above its two-week downtrending channel and advance past $54 per barrel, even though the supply-demand dynamics amid the extended pandemic lockdown may not support a sustainable move above $55.