#Need to Know: Amid the GameStop-led frenzy, Jefferies says ‘plenty of air’ to come out of riskier assets. Another strategist says wait to buy the dip

Amateur investors, many based on the Reddit group WallStreetBets, are jumping into heavily-shorted stocks, driving prices to astronomical levels and forcing hedge funds to sell bigger, safer bets to cover losses.

Selloff is creeping to other investments and spooking sentiment. Major indexes took a 2% to 3% ride down on Wednesday, though have buoyed back up slightly.

A must-read: Tendies? Diamond hands? Your guide to the lingo on WallStreetBets, the Reddit forum fueling Gamestop’s wild rise

Our call of the day comes from the U.S. equity researchers at Jefferies, led by global equity strategist Sean Darby, with a bonus call from Sébastien Galy, a strategist at Nordea Asset Management.

The team at Jefferies is clear that the correction in share prices has little to do with fundamentals. Rather, what’s happening is a reflection of a “sentiment shift within some of the more overbought and speculative parts of the market.”

The group’s retail speculative index, measuring the deviation from trend of assets where value is hard to determine, is high at 4 standard deviations. “Hence, there is plenty of air to come out of the riskier financial assets,” the team said.

Darby’s team noted that the short-term worry is whether the “popping” of riskier parts of the market will create a domino effect, as mainstream equities are liquidated to stem losses.

Galy, of the Nordic asset manager Nordea, echoes Jefferies’ caution about a wider selloff. He also says it’s too early to buy the dip, because there’s more to come.

The big moves to cover shorts at a time of high leverage typically forces more deleveraging, Galy said. This is because the constraint on capital from the risk of losses on investments is ratcheting up.

“As a consequence, the cost of hedging downside risk has sharply increased,” Galy said. “This risk reduction could last a few days followed by a sharp liquidity driven rebound in U.S. and to a lesser extent European stocks.”

Galy said that even a dovish Federal Reserve meeting on Wednesday couldn’t turn around this market, which is another signal that it may last.

The buzz

Shares in GameStop
GME,
-34.52%
touched the $500 level in the premarket before pulling back. The stock was just $19 heading into 2021. Fashion brand Nakd
NAKD,
+11.60%
is another stock making a big leap in the premarket, up more than 100%.

In a Securities and Exchange Commission filing this morning, cinema-theater chain AMC
AMC,
-51.31%
revealed that holders of the company’s convertible bonds have chosen to convert the notes into stock, as shares in the company have rallied around 330% since Tuesday. It’s a massive payout for lender Silver Lake.

Apple
AAPL,
-2.60%,
Facebook
FB,
-2.27%,
and Tesla
TSLA,
-2.92%
posted earnings after the close yesterday. Technology giant Apple topped $100 billion in quarterly revenue for the first time, crushing expectations, as social-media company Facebook also beat estimates, with sales soaring 156% from “other revenue” — like virtual-reality headsets and video-chat devices. Electric-car maker Tesla reported its sixth straight quarter of profit, but it was a miss on expectations.

But if you can peel your eyes away from the stock market, it is a big day on the economic front.

847,000 Americans filed for unemployment last week, down from 900,000 the week before. Expectations were for around 875,000 initial jobless claims. Continuing claims for the week of Jan. 16 came in at 4.77 million, a decline from 4.97 million in the previous week.

The U.S. economy grew 4% in 2020, following a slowdown in fourth-quarter gross domestic product. The trade deficit on U.S. goods narrowed to $82.5 million in December, from $85.5 billion.

Later in the day, new home-sales for December will be reported.

After the Federal Open Market Committee decided to hold monetary policy steady yesterday, Fed Chair Jerome Powell gave dovish signals that the central bank wasn’t done restoring the COVID-19 pandemic-ravaged economy to health. “We have not won this yet,” he said.

The markets

It could be another wild day on Wall Street. Yesterday’s tumult saw the Dow Jones Industrial Average tumble more than 630 points, and stock markets
DJIA,
+1.40%

SPX,
+1.49%

COMP,
+1.06%
are bubbling back up from losses today. Asian markets
NIK,
-1.53%

HSI,
-2.55%

HSI,
-2.55%
fell across the board and European indexes
SXXP,
+0.10%

UKX,
-0.63%

DAX,
+0.33%

PX1,
+0.93%
are mixed.

The chart

Our chart of the day, from Marshall Gittler at BDSwiss, shows how the S&P 500
SPX,
+1.49%
dropped by the most since October 2020, and the VIX index of expected volatility saw its biggest one-day rise since the COVID-19 pandemic hit in March 2020. 

The tweet

When the sharks root for the fish. Billionaire entrepreneur and investor Mark Cuban — of “Shark Tank” fame — is rooting for Reddit’s WallStreetBets traders.

Random reads

An Oklahoma lawmaker has proposed a ‘Bigfoot’ hunting season with a new bill.

Key West wants to ban people from feeding fat, feral, free-roaming chickens.

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