The turmoil in parts of the US stock market caused by the WallStreetBets crowd has led a veteran American trader to give up his old gambling game built over the decades.
Larry Peruzzi, head of international trade at Mischler Financial Group Inc. and a veteran of more than three decades in market action, said he spends less time on the fundamentals of stocks and much more time on techniques and chat rooms.
“Currently we look much less at balance sheets and much more at chat rooms, trade quickly and avoid trying to use any valuation during trading,” Peruzzi said. “It doesn’t make sense, but in 2020/2021 would we expect anything less?”
Markets have been turned upside down in the past week as traders have stocked up on stocks such as GameStop Corp. and AMC Entertainment Holdings Inc., hoping to eliminate short sellers. It worked: Melvin Capital closed its short position, and Citron Capital covered most of its short, with a loss of 100%. That’s the crowd in places like WallStreetBets new confident, even if the activity is drawing the attention of the Securities and Exchange Commission.
Historically, institutional investors have tended to welcome retailers because they added liquidity to the markets, Peruzzi said. But now it is causing major trading and liquidity problems, and speculation is growing that the funds could be forced to sell some stakes to deal with margin calls, he added.
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For now, there is a silver line, at least for companies whose stocks are stimulated by all activity, Peruzzi said.
“Most of these companies are fallen angels and many live on borrowed time,” he said. “The positive thing about all these irrational transactions is that if these companies are able to act quickly, additional stock offers could give them the much-needed capital to survive.”