Published: February 2nd, 2021
On Friday, January 29, Wall Street witnessed another frenzy of heightened sales as anxiety steadily crept over whether the hysteria that pushed GameStop and a handful of other stocks will ruin the bourse.
Another stint of frenzied buying consumed the U.S. stock market on the last day of the week that ended on Friday, January 29, after fears increased regarding GameStop's stock performance. Traders worried that the manic trade that sent the stock and a few others meteorically and fast was out to destroy Wall Street.
The S&P 500 declined almost 2%, the benchmark index's most significant weekly drop since August. The Nasdaq and the Dow Jones Industrial Average also slipped by similar margins.
GameStop gained almost 70%, claiming back much of what it had lost on Thursday, January 28. The drop was occasioned by the moderate limitations that the Robinhood app had temporarily imposed. The app reversed its stance, allowing traders to start trading on some of the stocks it had restricted.
GameStop has experienced a stunning 1,600% run for about 20 days. In the process, it has become the battlefront where throngs of smaller investors have been standing up to the 1%. The assault by these smaller investors has primarily been directed at Wall Street heavyweights and hedge funds that had predicted that the video games reseller's stock would plummet.
The bulk of firms that wagered against the stock encountered sharp losses. Investors said they were pushed to sell their other stocks to raise money. The subsequent sale pulled down parts of the market that had nothing to do with the bout between the minnows and the titans.
However, it was evident at the end of the day's trading session that the underdogs were having a field day. And the insane attraction to GameStop and a handful of other stocks previously derided by the markets took the focus away from the many other issues weighing down the financial system. No one had time to think about the back and forth over the potential aid to the economy, new strains of the virus, and vaccine rollout.
Tom Hainlin, the national investment strategist at U.S. Bank Wealth Management, said the markets' concern is whether the current situation will have a long-term influence on many categories of stocks or if it will concentrate only among a few companies.
Meanwhile, market harbingers called on regulators to step in.
Many legislators on Capitol Hill expressed their fears. The Securities and Exchange Commission (SEC) sent out a statement saying it would closely watch the situation.
The director of portfolio strategy at Verdence Capital Advisors, Megan Horneman, said that when the market experienced sustained volatility, such as it witnessed last week, many unknowns like what the retail trading world is going through emerge. People get concerned about extremes and record highs, and some even contemplate taking their money out of several items in their portfolio, the strategist added.
Overall, the S&P 500 shed 73.14 points to close the week at 3,714.24, etching a 3.2% loss in the process, which is the worst result the index has seen in more than two weeks. The stock market index measuring the stock trends of the 500 large companies on the stock exchange in the U.S. closed January with a loss of 1.1%, the first monthly drop since October. Overall, the index was still up 13.6% compared to the October 2020 numbers.
A few of the heavyweights in the index that propped it against significant losses include Apple, Microsoft, and a handful of other Big Tech stocks that have had a roller-coaster ride the past few months and remain favorites among professionals and other investors.
The Dow sunk 620.74 points to close the week at 29,982.62 points. The tech-heavy Nasdaq composite was down 266.46 points to record 13,070.69 points. Meanwhile, the Russell 2000 Index of smaller companies shed 1.6% or 32.97 points to close the week at 2,073.64.
Other forces that weighed the markets down include Johnson & Johnson, which lost 3.6% after announcing that its vaccine is not as effective as Pfizer's or Moderna's.
Elsewhere, the markets remain vigilant about increasing virus infection across Europe and Asia, the renewed travel restrictions, and negotiations between the GOP and Democrats over President Biden's proposed $1.9 trillion economic aid stimulus.
Hopes for a significant stimulus have shouldered the S&P 500 index and the other major, pushing them to record highs recently.
Meanwhile, the new week began with bad news for GameStop after the wild, run-up trades that are now synonymous with the Reddit crowd finally showed signs of crashing.
On Tuesday, February 2, GameStop Corp. dropped 34% during the pre-market trading in the U.S., stretching a 31% crash the previous day.
Other big losers included AMC Entertainment Holdings Inc., which shed off 25%, and Express Inc., which lost 18%.
Despite these significant declines, the speculative trading activity hatched online, and that took the handful of stocks to the moon has fascinated the global markets, attracted the attention of the U.S. legislators, and swamped brokerages over the world.
Now, it is apparent the tide is turning. A trader at Mirabaud Securities, Mark Taylor, said the short-squeeze momentum encountered its inevitable end. He likened the past week's activities to those of a raged, cheerleading chant against the system.
Data from S3 Partners, a financial analytics firm, indicate that the short interest in GameStop stock dropped to 53% of the shares available, from about 140% a few days ago. On Monday, January 1, the stock's trading also crumbled to about one-third of the average figures recorded in the past five sessions.
The stock markets were pushed to the brink following fears that the Reddit-induced, maniacal trading around GameStop shares and those of a handful of other stocks might consume Wall Street. All the major indexes lost about 2% each, with the S&P 500 slumping to its bad loss in three weeks. However, normalcy seems to be creeping back following the significant slip that the video game retailer's stocks experienced on Monday, January 1.