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Bearish action strategies call the GameStop saga a sign of a market bubble.
Marangifoto / Dreamstime
It was crazy weather. The remaining stocks for death were rising. The short sellers were taking a beating. And everyone wondered if too much “liquidity” was inflating bubbles.
It was 2003.
The GameStop saga, as a market event, seems to end last week.
GameStop‘s
the stock (ticker: GME) fell by 80% to $ 63.77 and, although this was still more than three times higher than at the end of 2020, its ability to captivate has seriously decreased.
Yes, politicians are still calling for investigations and planning regulations. Reddit marketers continue to gather around the besieged video game vendor. And we’re talking about “rigged markets” and “transaction democratization” and the little guy’s “revolt” continues to ring through the electronic halls of Wall Street and beyond. Even bearish action strategies have come into play, calling GameStop’s rip a sign of a market bubble that will surely appear any day.
If it doesn’t sound so familiar. Here is how the Trader column described the situation in May 2003, when the end of the dot-com had finally come to an end: “There are emerging indications such as speculative pike and latent selling pressure that can undermine strong markets. The riskier sectors outperform the wider market. Shares with low capitalization have screamed ahead of the largest in recent weeks … Shares at low prices, many of which have arrived for very good reasons, have been rising for months. “We could have pasted that into almost any Trader column in recent weeks.
The comparisons do not stop here. Recent headlines highlighting losses from Melvin Capital and other short-selling hedge funds were repeated in 2003. Only one of the 17 short-term funds ended positively that year with Rocker Partners, a prominent short-term fund that ended the year down 36%. David Rocker of the fund said it made him feel like “Alice at the ball of the crazy hat.” That quote could come from any short seller now.
What the shorts forget is that when a recession ends, damn companies, especially those that seem to have no future, come together. In 2003, the list included Lucent, the former Bell Labs; Yahoo! and
Ongoing research,
known today as
Blackberries
(BB). Today, there are names like GameStop,
AMC Entertainment Holdings
(AMC) and, well, BlackBerry. In fact, this makes sense: when the US falls into a recession, the weakest companies seek bankruptcy protection, while the rest buy some time. “We are on stage [in the business cycle] when you expect lower-quality companies to do better, ”says Barry Knapp, managing partner at Ironsides Macro Economics.
In the 12 months since the beginning of October 2002, the S&P 500 Quality-Lowest Quintile Index increased by 38%, doubling
S&P 500
19% increase. Low-quality stocks also outpaced the recession in 2009, with their index gaining 69% to the 47% gain of the S&P 500 in the last 12 months beginning in March of that year. (High-quality companies have high return on equity and lower leverage, among other factors, according to S&P. Low-quality ones do not.)
We haven’t seen this type of performance since the beginning of March 2020 – low quality gained 40%, with a 44% increase in the S&P 500 – but it could simply be at the beginning of the process. After all, the bear market lasted only 19 days. The low quality rally, if it occurs, should have legs. It certainly happened in the downturn in 2002 and 2009, when the superior performance of these stocks continued for the second year. This could mean that there are still opportunities in some poor quality areas of the stock market.
However, once the scraps are finished, long-term games can be hard to find. Some companies are disappearing, others are dominating their industries and even more struggling to exist, their stocks are going nowhere for a decade or more.
That was the case with utility
AES
(AES). It hit hard, as did many utility companies, after the collapse of Enron, and traded below a dollar in October 2002. A brief tightening led to $ 8.35 by June – a staggering 781% increase – and then to $ 25.52 in June 2007. Since then, it has never closed above the 2007 highs.
So far. The AES, which has a big business with renewable energy, finally came out of the field when Democrats gained control of the Senate in January. This, combined with a subsequent withdrawal, prompted Evercore ISI technical analyst Rich Ross to call it a “long high conviction,” offering a “14-year base destruction.”
But it’s not just the techniques that make AES, now trading at $ 26.86, attractive. His profits were a success from the Covid blockade, but not as great as expected. And it should get a boost from President Joe Biden’s climate plans and pressure to reduce emissions. The company also overcame – in the end – all the problems of almost 20 years ago, obtaining an investment rating from S&P in November.
After more than a decade in the wild, AES may be ready to run again.
Read the rest of The Trader:The stock market returns for good reasons – but the yield curve could cause problems
Write to Ben Levisohn to [email protected]