The Real Meaning of the Reddit Rebellion Against Stocks
- By Bilal Hafeez
- Sign-up to discuss on Slack
- 1 min read
It’s hard to ignore headlines about Reddit, Robin Hood and GameStop. Somehow amateur investors have been able to take on large hedge funds and beat them. It is retail beating Wall Street. It is discussion platform Reddit beating the Bloomberg terminal. It is millennials beating boomers. And surely this marks peak bubble for stocks. But beyond the hyperbole, three things stand out:
The Reddit rebels were buying, not selling, stocks. Their actions were targeted towards stocks that had been heavily shorted by professional investors. This could make investors more reluctant to short stocks going forward, which in turn could provide more support to broader stock markets.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- Reddit rebels were buying stocks and short squeezes are common after crises.
- This suggests stock markets may have more support than people think.
It’s hard to ignore headlines about Reddit, Robin Hood and GameStop. Somehow amateur investors have been able to take on large hedge funds and beat them. It is retail beating Wall Street. It is discussion platform Reddit beating the Bloomberg terminal. It is millennials beating boomers. And surely this marks peak bubble for stocks. But beyond the hyperbole, three things stand out:
- The Reddit rebels were buying, not selling, stocks. Their actions were targeted towards stocks that had been heavily shorted by professional investors. This could make investors more reluctant to short stocks going forward, which in turn could provide more support to broader stock markets.
- We’ve seen it before. For all the talk of the uniqueness of this phenomenon whether in terms of newly empowered amateur investors, the populist sentiment expressed by them or the generational differences, heavily shorted stocks tend to do very well after a crisis. We saw the same thing happen after the 2008 financial crisis. Back then heavily shorted stocks handily beat the overall benchmark.
- Professionals have poor risk management. Hedge funds are supposed to be sophisticated, yet if they require outside assistance after one position goes underwater, it suggests deeper issues at hand. It goes to show that the basics of risk management such as knowing your downside of any positions and being acutely aware of the risk of ruin aren’t always followed even by the most savvy investors.
So be wary of attaching cosmic significance to recent equity market volatility and be careful shorting stocks.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)