Are Robbinhood, Reddit and SLV like sun dogs for a stock market crash?

To be honest, we doubt that it is a mass movement driven by private investors. It is hedge funds that are being hunted. But it is also hedge funds that own Reddit. This is what hooks on and drive the hunt to its peak. There is more under the surface here…

The companies in focus are those whose shares are the most shorted. There are reasons why they are shorted. Citron, which is one of the most well-known hedge funds, is run by real smart traders who base their actions on fundamental analysis, that is, things that was done in the past- studied corporate profits and such. Since the central banks began to pump liquidity into the market, interest in momentum has risen while interest in fundamental analysis has declined.

During the weekend, the focus has shifted to silver. It is a small asset class and therefore relatively easy to influence.

The Hunt brothers tried to take over the silver market in the early 1980’s. The Hunt brothers were, among other things, the model for the popular TV series Dallas.

For example, watch this video:

https://www.youtube.com/watch?v=MXpNfNAyo9M

The silver price peaked at 120 USD but fell when their positions crashed, to as low as 7 USD. Note that the graph above is logarithmic, which is why the drama was greater than what appears from the graph. 

The advantage of silver, ahead of a hard-hit retail chain like Gamestop, is that there is a fundamental demand for silver. It is a finite resource, and it is a metal used in the industry. Our view, and it is also common on Reddit, is that paper silver keeps prices down. This is not to say that this raid will occur or even succeed. But it is well worth keeping an eye on this week.

On Twitter, #silversqueeze is currently trending.

Silver has not moved much yet but will be in focus when trading in the US starts this week.

Examples of related instruments: Long

Examples of related instruments: Short

Robinhood, which is the brokerage firm linked to the private investors’ revolt, has major challenges with its liquidity and capital requirements. There is a concern that the company will go under- during its own success. Parallels are drawn to the collapse after Lehman Brothers. But Robinhood is a small player so there must be visible spreading effects first before you should worry, as we see it. This mostly feels as a deliberate spread of rumors.

Elon Musk alone raised the price of Bitcoin by 15 percent last Friday in just five words, as seen above.

In any case, the well-timed tweet made Bitcoin test the upper limit of the wedge formation.

One can rightly ask oneself whether all these strange pheonomena foreshadow a stock market crash. Alternatively, is it just an expression of a mass phenomenon when Covid-19 has kept people trapped in their homes for far too long?

Odd phenomena such as sun dogs, such as those over Stockholm from April 1553, have always attracted interest since they are ominous major events.

The Q4 2020 reporting season in the US

When just over a third of the S&P 500 companies have reported, the proportion of positive earnings surprises has fallen marginally to 84 percent, while 77 percent is better in terms of revenue. Still very good, in other words. The three best sectors are Technology, Health Care and Financials – all with just over 90 percent of the reports that have surprised positively at the profit level. On the other hand, municipal power plants etc. (utilities) and the real estate companies have only managed to surprise positively in terms of profit in half of the cases. At the same time, there are few companies in these sectors that have reported their figures yet.

For all 184 S&P 500 companies that have reported so far, the average positive earnings surprise is around 10 percent. At the same time, analysts have revised their earnings forecasts upwards by 2.6 percent ahead of Q1 2021 as a weighted average.

Of the larger and well-known companies, Caterpillar, Eli Lilly, Facebook, Apple, Johnson&Johnson, Stanley Black & Decker, Whirlpool, Microsoft, Texas Instruments and Kimberly-Clark reported positive result deviations last week.

The results in Q4 2020 were worse than expected for e.g., McDonalds, Tesla, AT&T, Paccar, Verizon, and General Electric.

Source: Reuters/Carlsquare

The Swedish OMX30 companies have performed almost as well as the S&P500 universe so far, when 12 out of 28 have reported. 83 percent of these reports have surprised positively on the result, but only 67 percent on the revenue.

Source: Reuters/Carlsquare 

Momentum

If you look at the stock market, it is still elevated by too much liquidity in the system. Although the Reddit people will be both praised and soon blamed for various market manipulations, it is the result of a generous monetary policy.

The graph below shows how the S&P500 index has risen above the long trend line since Joe Biden was elected President of the United States. See weekly graph below. The stock market is thus technically overbought, but it is a stage that it may be in for long periods.

A trigger is needed to make it fall. The ongoing turbulence can be such a trigger where the hedge funds must quickly close all short positions. To do so, in many cases they are forced to turn off long positions to be able to afford to close the short positions. Such movements usually create buying opportunities, but we will see how the balance nets out.

The S&P500 index tests the MA50 in the daily chart below. MA50 is an important level in the general consciousness in the United States. A break from this, which may well be in the cards, is likely to trigger a lot of stops. MACD has created a weak sell signal. Those who are risk-averse and like to be a contrarian have an opportunity to go against the market here.