How to navigate GameStop madness — The strategy that outsmarted Wall Street — How Reddit traders are driving a populist movement

Hello everyone! Welcome to this weekly roundup of Investing stories from deputy editor Joe Ciolli. Please subscribe here to get this newsletter in your inbox every week.

Hello and welcome to Insider Investing. I’m Joe Ciolli, and I’m here to guide you through what’s been happening in markets, as well as what to expect in the coming weeks. This week is packed with all the GameStop and Reddit content you could ever ask for.

Here’s what’s on the docket:

  • An investment chief explains how the GameStop saga could upend long-standing practices on Wall Street — and shares her 4-part advice for navigating a frenzied environment
  • An inside look at the intricate strategy Reddit traders used to outsmart Wall Street’s bet against GameStop — plus 2 ways the rally could permanently alter the stock market
  • How Reddit-driven market mania goes beyond simple market trolling and represents a full-fledged populist movement.

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Have thoughts on the newsletter? Just want to talk markets? Feel free to drop me a line at [email protected]com or on Twitter @JoeCiolli.

Your weekly recap and outlook

If you’re reading this, that means you managed to make it through the stock market’s most absurb week in recent memory. You’ll always remember where you were when Reddit day traders banded together and pumped 90’s nostalgia stocks like GameStop to the moon — an unprecedented uprising that sent ripples through every layer of the financial system.

The story starts, of course, with the traders themselves, who conduct their business on r/WallStreetBets subreddit. They threw the exact perfect mix of market savvy, anti-establishment sentiment, and sheer will into a blender and came out with a destabilizing cocktail that left established Wall Streeters scrambling clean up the mess.

The central concept was relatively simple: focus on buying heavily shorted stocks, which will hopefully squeeze those positions until they’re forced to close, pushing the stock up even further. Ideally that inspires people that feel left out to pile in. Rinse, repeat. That these companies — which included Nokia, BlackBerry, and BB Liquidating (formerly known as Blockbuster) — were nostalgic, past-their-prime businesses was an added bonus to the Reddit crowd, who are never ones to pass up a chance at irony.

But the phenomenon goes far deeper than that. Underlying the memes and the hubris rests an anti-establishment streak. For a portion of the WallStreetBets crowd, this undertaking isn’t just about making money. It’s about making Old Wall Street pay, and the group isn’t exactly being coy about that fact. “It seems Occupy Wall Street had the wrong approach,” the official WallStreetBets Twitter account posted on January 26.

So what’s the damage look like on Wall Street so far? Arguably the biggest casualty has been Melvin Capital, which held a short position on GameStop that’s left them down 53% year-to-date — performance so bad that investing titans Steve Cohen and Ken Griffin have had to bail them out. 

But it hasn’t been all negative. Silver Lake Partners saw a convertible-debt investment strike gold when AMC Entertainment’s stock surged this past week. The firm was able to flip that debt into stock, which it then sold at the peak for a smooth $113 million profit. Some have called it the “trade of a lifetime.”

Then there’s also the matter of the preferred trading platform for the Reddit army: Robinhood. The online brokerage had a week for the ages after restricting further buying of GameStop, then backtracking after backlash from everyone from AOC to Chamath Palihapitiya. There have also been reports that Robinhood was forced to draw on bank credit lines amid the madness. How this impacts the company’s quest to go public this year will be a story to watch in the coming weeks.

So where do we go from here? One thing to watch is how hedge funds react. They were already shedding equity exposure in the early days of the GameStop craze, and it’s possible the market dislocations exploited by Redditors will cause them to retreat further.

Many other questions remain. Who else was caught short and ultimately doomed by WallStreetBets? Who else raked in big returns like Silver Lake? When will the so-called meme stocks come plunging back down to earth? And will the stock market ever be the same? Keep watching this space to find out the answer to those, plus many more.

JOIN OUR LIVE EVENT: A conversation with Insider’s markets gurus on the GameStop and Reddit-trader phenomenon

Join us Tuesday, February 2, 2021 at 1:00 p.m ET as deputy editor Joe Ciolli, markets and economy reporter Ben Winck, and senior investing reporter Vicky Huang discuss the GameStop phenomenon, the influence of WallStreetBets, and how the Reddit-fueled trade might end.

Register here.

How to navigate a GameStop crazed environment

Ally Chief Investment Strategist Lindsey Bell says the meme-stock rally could be a good thing for average investors. Still, she says traders who want to play the newest hot stocks should understand they are speculating. Bell also advises investors to have a plan and stick to it when things get strange, and understand how unusual this time is.

Read the full story here:

A chief investment strategist breaks down how the GameStop saga could upend long-standing practices on Wall Street — and shares her 4-part advice for navigating the frenzied trading environment

The intricate strategy GameStop traders used to outsmart Wall Street

Steve Sosnick — the chief strategist of Interactive Brokers and head trader of its trading unit Timber Hill — breaks down the short squeeze and gamma squeeze Reddit traders put in place for GameStop. He also shares how the massive moves in these so-called meme stocks could permanently alter markets.

Read the full story here:

A veteran options trader breaks down the intricate strategy that Reddit traders used to outsmart Wall Street’s bet against GameStop — and shares 2 ways the parabolic rally could permanently alter the stock market

How Reddit-trader mania represents a full-fledged populist movement

The Reddit-fueled trading phenomenon lifting GameStop, AMC, and other stocks is backed by populist sentiments. Cries to dethrone the establishment and redistribute wealth resemble those seen at Occupy Wall Street protests in 2011. The trend has all but certainly formed a bubble, but its political messaging can still live on.

Read the full story here:

The GameStop mania driven by Reddit traders isn’t simple market trolling. It’s a populist movement threatening to disrupt the financial system to a degree Occupy Wall Street only dreamed of.

JOIN OUR LIVE EVENT: Execs reveal what’s on tap for the red-hot IPO market in 2021

Join Insider on Wednesday, February 3 at 2:30 p.m. ET as Insider’s chief finance correspondent Dakin Campbell moderates a panel featuring Kim Posnett, Goldman Sachs partner and Internet investment banking chief, Greg Rodgers, a Latham & Watkins LLP attorney and direct-listings expert, and Mitchell Green, a venture capitalist at Lead Edge Capital who backed Uber, Spotify, Asana, and Alibaba.

These IPO experts will discuss what you can expect for the year ahead and how the recent changes have dramatically altered the calculus for startup entrepreneurs. They will also take reader questions. 

Register here.

Stock pick central

Seeking experts who are willing to name names? Look no further:

  • Jefferies says these 20 heavily shorted and lightly traded stocks could see big jumps in the event of a GameStop-like squeeze
  • Buy these 26 heavily shorted stocks as retail traders trigger wild rallies in Wall Street’s least-liked names, Wells Fargo says
  • GOLDMAN SACHS: These 22 stocks still haven’t recovered to pre-pandemic levels — and are set to explode amid higher earnings in 2021 as the economy recovers
  • Morgan Stanley says buy these 17 stocks with strong earnings that are expected to outperform into 2022 even if the broader market sinks
  • BANK OF AMERICA: Buy these 31 unheralded stocks as the recovery’s hottest trades of recent months continue to gain strength in 2021
  • Buy these 13 stocks poised to benefit from a boom in 5G smartphone adoption, UBS says — including one expected to surge 69%
  • Goldman Sachs says buy these 26 renewable-energy stocks best-positioned to benefit from increased spending as governments aim for net-zero emissions
  • MORGAN STANLEY: Buy these 9 sports-betting stocks ahead of the industry’s expected legalization in 12 states this year and its growth to $10 billion in 2025

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