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Recapping the rally in heavily-shorted stocks

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In Thursday’s Morning Brief, Myles Udland recaps the continuing rally in highly-shorted stocks fueled by attention from Reddit.

Video Transcript

JULIE HYMAN: --begin, though, with GameStop and AMC and Bed Bath and Beyond, and all of the other stocks that have been seeing this short squeeze in recent days.

Getting reports this morning from people who use Robinhood in particular that basically, it's not allowing people to put on new positions in the likes of GameStop. You can close out your existing positions on the platform, but you can't make new ones. And in fact, some users are reporting that when you try to type in certain tickers, it's not even populating. You can't even access those tickers. So that appears to be what has triggered, now, the sell-off in the shares, the latest in this saga that we have been following very closely this week.

Meantime, S3 Partners saying short bets on GameStop alone have lost $23.6 billion through Wednesday, so that [INAUDIBLE] people on the other side of this trade. I keep trying to figure out how this movie ends. And maybe this is the beginning of the end. Who knows? What do you think, Myles?

MYLES UDLAND: Well, I think we saw some of the outlines of just how much this matters to the market in yesterday's session. And we're seeing it today. And I know we're going to talk about some of the big earnings we've had at Apple here in a second, the best quarter in the company's history, and the stock is under pressure as a result.

When we discuss some of the mechanics-- and it really came into focus throughout the session yesterday-- and the basic outline here is, hedge funds, who are, a lot of times, the marginal bid around these stocks, and retail obviously a big part of this-- they have a long and short book.

So a lot of hedge funds have been piling into the FAANG names, the SaaS names, the chip names, all the stocks that have gone up, Zoom, Peloton, so on and so forth. And they've done quite well. On the other side of their book, there are going to be short names, sometimes popular names like GameStop.

And to cover their losses on the short side, they are going to have to sell some winners. I think that was the source of the pressure in the market yesterday. Overall, futures are pointing to a higher broad market open. But again, those big winners, the mega-cap tech names, the most liquid names in your portfolio-- those names are under pressure today.

And Sozzi, I don't know how far this goes. I don't know how much money is out there that needs to scramble, to sell things, to raise cash, to cover margin calls, and so on and so forth. But that's the mechanic that's playing out right now.

BRIAN SOZZI: Yeah, Myles, it really doesn't even appear it's anywhere close to over. And it's been fascinating for me as more of a fundamental analytical person to get the reactions and talk to a lot of veteran folks on the street.

I got a note in my email inbox from Peter Boockvar over at Bleakley. He notes in a pretty long note describing this action, quote, "This is nothing more than a classic pump and dump that we've seen many times before, and that always ends the same way." And it's something that we've been talking about on the show a lot this week.

At some point, there will be a day of reckoning. Whether that's now or later in the session or tomorrow, it will eventually come, as the market refocuses again on fundamentals.

But I do want to highlight-- I think there's a lot of these traders out there with a list of heavily shorted stocks, and they're looking for the next target. Into the close yesterday, we saw a large spike in Build-a-Bear. That stock at one point was up close to 60%.

Also, I want to highlight some interesting action in Macy's. Yesterday, the stock was up 12%. It was up close to about 12% in the pre-market. It has given back those gains here. But again, Macy's, another heavily shorted stock. According to Yahoo Finance data, about 32% of the float of the stock is heavily shorted, so another name that could see some action, perhaps, later on in today's session.

MYLES UDLAND: And I just want to quickly, also, go back to the, how does it end question. And again, I don't think any of us knows. And I mean, I can't wait to see the answer. I think we've been thinking that for some time now.

But with those reports, those indications, really, that we've heard from multiple people that we all know, whether they're friends and family members of the crew here at Yahoo Finance who are trying to find these names on Robinhood, part of the answer is that whoever you are trading with, whatever platform you use, they are your counterparty risk. And yes, it is your money. But if they deem that they need to keep that money, or there are things that they need to do to square themselves out before they can release your position to you at a price that-- at whatever price they deem acceptable to clear their book, that can happen.

And I think if we go way back in time to the financial crisis, what was that problem? That problem was a liquidity crunch. And this is-- I hate to do it this way-- that's the point of the movie "The Big Short," is that you have to have someone on the other side of your trade who has enough money to actually make your trade real.

And it seems that there might not be enough money on the other side of some of these trades, whether it's on AMC or GameStop or other names, particularly in the options market, which is a little thinner, to make the implied value of that actually real. And I think we're about to see a lot of people learn a lesson in counterparty risk as a result of that, not at the scale of the financial crisis, but it is the same dynamic.

JULIE HYMAN: Well, and then the other side of this risk is not counterparty risk, but the risk to Robinhood is brand risk. Because on the one hand, does it risk being seen as this playground for this type of behavior, and that is viewed as negatively by some? It was already kind of viewed that way anyway. Or does it risk losing a lot of its very loyal users by-- even if it must block this access because of counterparty risk, does it then risk some of those users going to other platforms? So we'll see how that plays out, also.