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The turmoil in parts of the US stock market caused by the WallStreetBets crowd prompted a seasoned American trader to abandon his old playbook built over decades.
Larry Peruzzi, head of international trade at Mischler Financial Group Inc. and more than three decades of market action veteran, said he spent less time looking at fundamentals of stocks and much more time on technical aspects and discussion forums.
“We currently review a lot less on balance sheets and a lot more in chat rooms, trade quickly and avoid trying to use a valuation while trading,” Peruzzi said. “It doesn’t make sense, but in 2020/2021, would we expect anything less?”
Markets have been shaken up over the past week as day traders invade stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. in the hope of bringing out the short sellers. It worked: Melvin Capital closed its short position and Citron Capital hedged the majority of its short position with a loss of 100%. This has crowds in places like WallStreetBets newly confident, even if the activity is get the attention of the Securities and Exchange Commission.
Historically, institutional investors tended to welcome retail traders because they added liquidity to the markets, Peruzzi said. But now that poses major trading and liquidity issues, and speculation is growing that funds may be forced to sell certain positions to meet margin calls, he added.
Read more: Cohen, Sundheim lose billions to Reddit traders running Amok
For now, there is a silver lining, at least for companies whose stocks are driven by all the activity, Peruzzi said.
“Most of these businesses are fallen angels and many live on borrowed time,” he said. “The good thing about all this irrational trading is that if these companies are able to act quickly, additional stock offerings could give them the capital they so badly need to survive.”
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