Broker Check

Adaptive Advice – Weekly Market Update: Market falls from record highs as short sellers get squeezed

January 29, 2021

The final week of January saw the S&P 500 (-3.3%), Nasdaq Composite (-3.5%), and Dow Jones Industrial Average (-3.3%) fall more than 3.0% this week, as risk sentiment was pressured by a frenzy of short-squeeze activity. The Russell 2000 dropped 4.4%.

To begin, GameStop (GME) entered the week at $65 per share and peaked at $483 per share later in the week, as it become the poster child for the short-squeeze mania/rebellion against short sellers. Things got so wild that brokerage firms restricted trading activity on heavily-shorted stocks like GME, which sent these stocks lower and drew the ire of many market participants.

These brokerage firms eventually eased some restrictions, allowing users to resume their speculation and push these stocks higher at the end of the week. GME shared ended the week higher by 400%. This volatility unnerved the market for multiple reasons, including concerns about fund managers selling long positions to cover their shorts and, for some, the potential for increased regulation.

The drama fixated the market and took away from the batch of better-than-expected earnings reports, including from leading companies like Apple (AAPL), Microsoft (MSFT), Facebook (FB), and Tesla (TSLA). To be fair, MSFT shared did gain 2.7% this week.

All 11 S&P 500 sectors closed lower. The energy sector was the weakest link with a 6.6% decline. On the other end was the real estate sector with a modest 0.2% decline.

In other developments, Fed Chair Powell delivered a dovish-sounding post-FOMC press conference, reports suggested that President Biden’s $1.9 trillion stimulus deal could be pushed back to mid-March due to bipartisan objections, and fourth quarter real GDP increased at an annualized rate of 4.0% ( consensus 4.4%) despite a challenging macroenvironment.

On the vaccine front, Johnson & Johnson (JNJ) published encouraging data for its one-shot COVID-19 vaccine, although the efficacy rate was much lower than the two-shot vaccines currently on the market. Novavax (NVAX) said its vaccine candidate produced an 89.3% efficacy rate in its Phase 3 trial in the UK.

For what it’s worth, the S&P 500 set an intraday all-time high early in the week and ended the week marginally below its 50-day moving average (3716). The 10-yr yield was unchanged at 1.09% despite the market volatility.

Our updated 401k allocation recommendations will be available February 1 along with our February Newsletter.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.

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