Short-Squeeze Led A Textbook Selloff In Stocks

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Commenting on the historic short-squeeze on Wall Street and today’s trading Gorilla Trades strategist Ken Berman said:

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Hedge Funds Forced To Sell Amid The Historic Short-Squeeze On Wall Street

While today's ugly session could be the start of an orderly pullback, we could be in for some surprising moves due to the nature of the selloff. Hedge funds were reportedly forced to sell to raise capital amid the historic short-squeeze on Wall Street and while today’s selloff was scary, these liquidations often end with spectacular rallies like in the wake of the ‘volatility apocalypse’ exactly three years ago.

While all of the main sectors closed the day with losses, there were a few notable bright spots. The recently struggling energy sector held up well thanks to the bullish crude oil inventory number, while the tech sector was propped up by the bullish earnings from Microsoft even as a lot of major players, such as Google parent Alphabet (GOOG, -4.7%) and Netflix (NFLX, -5.6%) were hit hard. Communication services, materials, healthcare stocks, and financials lost the most ground amid the rout, and the Dow hit its lowest level since the days of the year due to the weakness among cyclical issues.

The Fed left its benchmark rate unchanged today, in line with expectations and the Central Bank’s monetary statement also lacked surprises. Chairman Jerome Powell acknowledged the weakness in the job market and reiterated that uncertainty remains elevated, but the Fed likely opted to wait and see how much the fiscal stimulus packages and the vaccination efforts will support growth in the coming months. Treasury yields finished in the red in the wake of the Fed’s announcements, so investors likely think that the Central Bank will have to intervene in the coming months to boost growth.

A Textbook Profit-Taking Selloff In Stocks

The epic short-squeeze and forced liquidations together with the still overbought momentum readings led to a textbook profit-taking selloff in stocks, with the Volatility Index (VIX, +56%) topping 30 and hitting its highest level since early November. While the selling pressure eased ahead of the Fed’s statement as socks turned choppy across the board, the bearish trends continued in late trading. Despite the encouraging stability of the past few weeks, the major indices already got close to their 50-day moving averages, so the advancing short-term trend is now in danger.

We are in for another busy day of quarterly reports and economic releases, and this afternoon’s tech earrings will likely have a major impact on the broader market overnight and in early trading. The first reading of the fourth-quarter GDP print will be out in pre-market trading, together with the weekly jobless claims report, while new home sales and the CB Leading Index will hit the market just after the opening bell. Mastercard (MA, -3.4%) McDonald’s (MCD, -3.4%) and Comcast (CMCSA, -3.2%) are also scheduled for the pre-market session, while Visa’s (V, -3.3%) report will be out after the close. Stay tuned!


  • The major indices all finished significantly lower as forced institutional selling weighed heavily on some of the leaders of the market
  • The Fed left its monetary policies unchanged despite pointing out the renewed weakness in the job market and the most virus-sensitive industries
  • Several of the most-shorted stocks registered mind-boggling gains as retail traders piled into the sector, triggering a massive short squeeze that affected the broader market too
  • Apple (AAPL, -0.8%), and Facebook (FB, -3.8%) reported bullish earnings after the closing bell, with Apple’s quarterly revenues of $111 billion beating all records, but Tesla (TSLA, -1.7%) missed on its bottom line
  • Treasury’s gained ground due to the risk-off shift as volatility skyrocketed and global stocks joined the selloff

Market Wrap

Index G/L Current level Year-to-date 50-day 200-day
Dow -634 30,303 -0.9% 30,295 27,513
Nasdaq -355 13,271 3.1% 12,668 10,994
S&P 500 -99 3,751 -0.1% 3,710 3,341
Russell 2000 -40 2,110 7.0% 1,958 1,589

Decliners outnumbered advancing issues by a 4-to-1 ratio on the NYSE today, with 85 stocks hitting new 52-week highs and no stocks hitting new 52-week lows, while volume was extremely high.

Price Action Gauge ******** (reading for 01/27: 48)

The major indices suddenly dropped by the most since late-October following weeks of relatively quiet trading and the second half of the week could remain highly volatile as the earnings season is also heating up, but the bullish long-term trend is in no danger.

Oversold/Overbought Gauge ******** (reading for 01/27: 47 Color: green)

The key momentum indicators turned lower today, but the major indices are still overbought according to them so the pullback could continue.