Historic short squeeze in US stocks and semiconductor constraints Historic short squeeze in US stocks and semiconductor constraints Historic short squeeze in US stocks and semiconductor constraints

Historic short squeeze in US stocks and semiconductor constraints

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Yesterday's crazy moves across a large group of heavily shorted US stocks underscore the complex feedback loops have arisen across a new wave of retail investors, easier access to options trading, a fascinating stock forum on Reddit and the massive size of ETFs reducing float in equity markets. We uncover the events and try to discuss the implications for markets. We also discuss the rising evidence of more supply constraints in the global economy now also reaching alarming levels in the semiconductor industry impacting production of cars.


Yesterday was an unusual day in US stocks due to the multiple short squeezes in many of the most shorted US stocks. There is no single cause for these moves as they are likely driven by a complex interaction across many market functions. But one force there has been mentioned is the stock forum r/wallstreetbets on Reddit where day traders discuss stocks where it seems an orchestrated move on the most shorted stocks including GameStop was engineered. The trades were mostly done in weekly call options which if volume is large enough can cause what is called a gamma squeeze (read an explanation here) and something we covered back in September. The moves also forced the hedge fund Melvin Capital to raise $2.75bn from Citadel and SAC to survive the short squeeze. The table below shows some of the most shorted US stocks that were part of this short squeeze.

Source: Bloomberg

The chart below tweeted by Robeco Asset Management shows the performance of the most shorted stocks in the US and how things structurally changed in 2020 and beyond. Any investor trading these markets and using momentum strategies will have to understand these concepts in order not to be wrongfooted.

Source: https://twitter.com/Robeco/status/1353984330788466688

What happened has been covered widely and we recommend readers to read through some of the links we have highlighted above. Now we will try to discuss what it means for markets and the future of regulation. A lot of what is happening is driven by the easy accessibility of trading through trading apps such as Robinhood but also the easy access to options trading which temporarily can cause these gamma squeezes when done in large size and heavy put/call skew. Large passive ETF holdings take out outstanding shares reducing the float in many names which causes liquidity constraints which can amplify the moves like the ones yesterday. High frequency trading can then amplify the moves even more due to chasing short-term momentum effects. There is no single solution to many of these phenomena underscoring the rising complexity in financial markets, but our best guess is that we could see a spectacular blow-up in equity markets under the right conditions and that this event will be the necessary wake-up call for regulators to re-design financial markets. One thing is for sure, these topics will be discussed at length this year as we do not think it is over yet.

Semiconductor constraints and reflation

In our Q1 Outlook published today we explain our thesis of why reflation will become the most important market theme to monitor over the next 12 months. There have been many signs the past six months of supply constraints across container freight and commodities, and in general the underlying inflation in the US has been rising steadily with an acceleration in November and December (see chart below). China’s PPI y/y will most likely swing into positive in January and with base effects setting in over the next 3-4 months inflation rates will pick up. Financial Times is covering today the ongoing supply constraints in the semiconductor industry and how it is causing carmakers to halt factories which will impact supply of cars just as demand is rebounding this year. Carmakers do not have the bargain power over other customers at semiconductor manufacturers as they are only 10% of chip demand and carmakers are losing out. This is becoming a national security risk for the US and Europe which are the two geographical areas of the world most affected by the current situation, which has also been amplified by the US sanctions of Chinese semiconductor firms. The semiconductor industry hope that the constraints will have been resolved by the second half of this year.

Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.