Stocks and index ETFs are gaining on the first day of February, as investors are pushing aside fears about a speculative retail trading bubble that helped to catalyze the market’s worst weekly sell-off since October.
On Monday the Dow Jones Industrial Average advanced 0.82%, while the S&P 500 rallied 1.57% and the Nasdaq Composite jumped 2.4%. All markets had been trading lower, but found at least temporary bottoms in the overnight futures session on Sunday, with the rally continuing into the regular trading session.
GameStop tumbled as much as 34% on Monday and trading was halted briefly. The company has been the focus of considerable attention recently, with the stock soaring 400% amid extreme volatility fueled by retailer investor enthusiasm on Reddit forum WallStreetBets.
Investors and analysts were concerned by an explosion of retail trading activity in GameStop and other heavily-shorted stocks like AMC Entertainment, which has prompted hedge funds to limit risk across the board. The chaos has been so significant that Goldman Sachs said that the short squeeze triggered by the retail traders is the most extreme in 25 years.
Silver Now Being Squeezed
Analysts are still assessing the long-term effect for stocks and ETFs. Reddit traders have also moved on to silver, where futures markets soared above $30 overnight before declining some. The iShares Silver Trust (SLV) has been surging, up over 7.6% Monday. The phrase ‘#silversqueeze’ has been trending on Twitter.
“The return of volatility over the past week has been driven by market positioning rather than worries over growth,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note.
“Many institutions have been adjusting their books to account for the risks to short positions arising from recent coordinated buying by retail investors. But given the speed and magnitude of flows in recent days, we think most of the pressure is now behind us,” Haefele said.
All three stock benchmarks slipped over 3% last week to score their worst weekly performance since October, with the Dow and S&P finishing the month of January down, the first negative month in four months. Nasdaq was able to hold onto a win for the month.
“Despite the uncertainty surrounding the fallout from the surge in prices for stocks with substantial levels of short interest, we don’t see the advent of a 1998-style liquidity crisis,” Sam Stovall, chief investment strategist at CFRA, said in a note. “Even though we think the equity market needs to go through a readjustment of expectations and valuations, we don’t think the bull has come to an end, nor are we recommending any changes to our year-end S&P 500 target or asset allocation.”
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