GameStop wiped out January’s gains from the Exchange. February could be worse.

Of course, there was more than just wild trading for the stock market. Investors have learned that the US economy has grown at a rate of 4%, a decent figure in normal times, but not when the economy is trying to recover from the carnage of Covid-19. The long awaited revelation of

Johnson & johnsonof

(ticker: JNJ) Vaccine data – the one that was supposed to help rejuvenate reopening trade – has failed to meet high market expectations.

But investors were transfixed by the surge in heavily sold stocks like

GameStop

(GME) and

AMC Entertainment Holdings

(AMC), companies that had been left for dead but whose shares were certainly not, thanks to a host of Reddit investors.

The good news: the pain will likely be short-lived.

Let’s start with the vaccine. J&J was expected to report an efficiency rate of at least 80%, but it was only 66%. Its stock fell 3.6% on Friday after the news broke, and S&P 500 futures fell sharply amid all the noise of short stocks. Experts quickly defended the vaccine, however. They noted that it prevented severe symptoms in 85% of patients, meaning even those who caught the virus had coughs, sniffles, and fever, but avoided the worst results, while achieving the same level. in the treatment of the more contagious South African strain.

“These numbers may not be as impressive, but this vaccine has a role to play,” says Dave Donabedian, chief investment officer at CIBC Private Wealth Management.

This should be great news for the US economy. Things – obviously – aren’t booming at the moment. Fourth-quarter gross domestic product rose 4%, a little slower than the 4.2% economists predicted, but still strong given the Covid-related shutdowns in the last three months of the year. We’ll also get a glimpse of what January will look like when payrolls are released on February 5 – the United States is expected to have created 150,000 jobs last month, up from 140,000 in December.

Growth is expected to pick up in the coming months, thanks to vaccines and the fiscal stimulus, which will almost certainly come, one way or another. Bank of America economist Michelle Meyer expects the US economy to grow at a rate of 6% in 2021 and 4.5% in 2022. Full employment could also be reached by the end. 2022, which would bring inflation down to the Federal Reserve’s target rate. And if so, Fed Chairman Jerome Powell could start raising rates by the end of 2023. “Clearly that would be an exceptional result,” Meyer writes. “If all goes according to plan, President Powell and [Treasury Secretary Janet] Yellen will be able to bow. “

Powell did nothing to suggest a rate hike or even the start of a cut in bond buying at last week’s Federal Open Market Committee meeting. He continued to insist that the Fed will stay easy until it exceeds its target inflation rate and job growth has recovered. The subtext: The Fed no longer relies on economic models to assess when it should tighten monetary policy, but will attempt to use available data to judge the strength of the economy.

This shift has contributed to short-term market volatility, says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. “The Fed has abandoned the framework it had and which Wall Street was following,” he says. “Now it’s a little detached and sensitive to the narrative.”

And what a tale that has been. The GameStop Squeeze Shorts quickly became a character tale of little guys taking on the man. I’d rather see it for what it really is – a group of small investors have discovered the joys and potential profitability of day trading like they haven’t since the dot-com boom and bust.

One thing traders need in order to profit is volatility, and this has been lacking for many years. But it’s no surprise that the comeback of day trading coincides with a market that is not only going up, but also doing so strongly, like what investors experienced in 1998 and 1999. One of the things that put end of my trading career and sent me into journalism was the lack of volatility from 2003.

What’s going on with GameStop isn’t even that new. Wall Street businesses love

Barclays

and

Jefferies

sent their clients lists of stocks with the most retail activity. And the skyrocketing of GameStop and other heavily short-circuited names hasn’t been all that different from the marijuana stock mania in 2018, for failed companies like

Hertz Global Holdings

(HTZGQ) in June, or even the electric vehicle rally in November. Recent deals have just grabbed the market’s attention in a way that others haven’t. This is in part because investors didn’t have much of a “fundamental” argument to buy GameStop for $ 300, as they could.

Tilray

(TLRY) – just think of all the marijuana she will be selling once the pot is legalized! – or the future domination of electric vehicles.

But the other big difference is that institutional investors – hedge funds – were very short on GameStop,

Blackberry

(BB) and the rest. They had assumed that the companies were dying, so the inventory must be too. “GME is a reminder not to bypass struggling companies at the start of an economic cycle,” writes Nicholas Colas, co-founder of DataTrek Research. “Wolf packs for retail investors are new, but if you’ve ever sat on a hedge fund trading desk, you know that squeezing shorts has been a blood sport on Wall Street for decades.

This is evident from how the stocks that make up Wall Street’s lists of short-term top-selling companies have cropped up one by one. But the mere fact that the short sellers are involved doesn’t make these stocks skyrocket the way they did. The missing element is liquidity. In August, options traders were able to rise

Apple

(AAPL) and other FAANGs are higher – Apple gained 22% in that month before peaking on Sept. 1 – but the enormity of the companies means it’s harder for a crowd of traders to push the actions.

This is not the case with GameStop and its ilk. Jefferies strategist Steven DeSanctis notes that small-company Russell 2000’s top-selling stocks outperformed the top-selling by 28.3 percentage points, the largest on record. The difference for large-cap Russell 1000 stocks is only 5.4 points, the ninth-largest spread since 1996. The difference in performance may be explained by the lower number of small-cap stocks. capitalizations. “Volume is up, but liquidity is down,” DeSanctis says.

But credit must be given where it is due. It may have been a crowd that made GameStop jump over 1600% in January, but mainstream investors love The big courtMichael Burry, director of Scion Asset Management, as well as more recent ones like “DeepF – ingValue”, have been arguing for some years now to buy the stock and put their money to work. And these trades were really valuable, requiring patience to be profitable.

But you didn’t have to endure the pain to see something different going on with GameStop over the past six months. It rose 24% on August 31, when RC Ventures, managed by Ryan Cohen, first disclosed a 9% stake in the company. He gained 22% on September 16, when he started taking orders for

Sonyof

PlayStation 5. On October 8, it jumped 44% after announcing a multi-year partnership with

Microsoft

(MSFT). The title traded sideways for a while, but never came close to testing its sound until October. 8 bottom. To a fundamental analyst, the company could have appeared dead in the water. For a technician, it was anything but.

As for the market, it needs a rest – and it will likely get one. One of the side effects of the short squeeze is that it forced hedge funds to sell the stocks they own so they could cover their shorts. This includes those like Apple and

Facebook

(FB), which fell 5.1% and 5.9% last week, respectively, despite strong earnings reports. Increased market volatility is also forcing some funds to reduce their long positions in order to reduce risk.

While the odds are low, the possibility of contagion is real. And if nothing else, it will force investors to reconsider what they own and what they want to own in the long run. “We expect this type of pullback to be a good buying opportunity,” says Julian Emanuel, BTIG strategist. “Sounding off some of this speculation is likely to be a positive.”

The withdrawal comes just in time. This February is the second month of the presidential cycle, and it’s generally pretty terrible, with an average market drop of 1.1%. Each sector recorded an average loss during the second month of the presidential cycle. It’s not that every February is bad – the returns have been positive 12 out of 23 times – it just is. “You should NOT assume that February 2021 is ‘doomed’ to be a bad month for stocks,” writes Jay Kaeppel of Sundial Capital Research. “What you have to recognize is that when month 2 is ‘good’, you are fine. And when month 2 is bad, it’s often very bad. ”

Hold on to your hats.

Write to Ben Levisohn at [email protected]