I never take pleasure in seeing people lose money. But I must admit to feeling some schadenfreude in seeing a short-selling suit go crying to the Securities and Exchange Commission like a baby, when the scare and rabble-rousing tactics he uses against retail “suckers” are turned against him.
The short squeeze on US videogame retailer GameStop (US:GME) will long be remembered. For the first time in a long time – perhaps ever - retail traders (or reckless gamblers, or the Robinhood mob, or however you want to put it) managed to mobilise themselves effectively via social media platform Reddit and put the hurt on hedge funds that had for so long dominated the stock by shorting it, not least well-known short activist Citron Research.
Perhaps we can consider retail traders as this story’s Joan of Arc. The hedge funds (the English, for the purposes of this narrative) had become so accustomed to winning that they became complacent. The conditions were set for an explosive conclusion. As of 21 January, more than 130 per cent of GameStop stock – a bricks-and-mortar business whose model looks largely defunct in an era of digital downloads – was sold short.
The GameStop short squeeze quickly became a meme on WallStreetBets, a subsection of Reddit, and like any seductive idea it began to snowball and gain traction. It’s also notable that Yahoo forums were responsible for large price moves in stocks in the dotcom era. These days, stocks are manipulated in Telegram and Discord – private groups that are free from the prying eyes of the regulator.
The WallStreetBets episode is worthy of note for any trader. The squeezed funds can argue as much as they like that the stock is worth less than $20. But that doesn’t matter much when the stock is $150 bid – or over 700 per cent in the hole for the shorters. What matters is not what should be, but rather what is, because at the end of the day you will live and die by your profit-and-loss account. We rarely see such epic short squeezes here in London. Brokers are now much less keen to forward sell placing stock that is subject to General Meeting (due to the New World Oil & Gas and Room Service short squeezes) and borrow is already limited.
But as we have seen in my article on market makers ‘Shake your market maker’ (24 October 2019), a combination of significant news and heavy volume can put the market makers on the back foot, where they are net short and must bid the stock up to cover their short, which only sees momentum traders and spike chasers jump on board. They do cover eventually through shaking the tree, and widening the spread, but finding stocks like these early in the trading day can be highly profitable.
Gulf Keystone Petroleum (GKP) is a previous mania, and offers a warning for those newly enriched by GameStop’s heady ascent – Joan of Arc lost in the end. The company found oil and punters couldn’t get enough of it. But eventually, reality came crashing down, and the company fell from a high of 40,000p to today’s price of less than 150p. Since those days, the company is now in much better shape with its Shaikan asset, and yet retail is no longer interested.
But for traders, shares are there to be bought and sold, and Gulf Keystone Petroleum is no exception. In Chart 1, we see a cup-and-handle bottom base forming, and the stock breaking out. If we look a few sessions prior to the arrow, we can see that volumes increased before the stock broke out. This was the first clue that the stock was potentially changing trend.
Once the stock broke the 200-day exponential moving average (EMA) it was off to the races for Gulf Keystone. The stock paused for breath at 220p, and then consolidated before tracing back upwards and gapping up on positive news. Traders can often be quick to book profits as the target is reached, and having banked a profit it’s on to the next trade.
However, it is a mistake to treat all trades as equal. Some set-ups produce better trades in terms of expectancy than others. Other trades have much better mechanics – liquidity is always a factor in a trade. For example, Yu Group (YU.) issued an excellent trading update on Tuesday this week, and there was a scramble for stock on the bell, which quickly forced the price upwards. This illiquidity pushed the price up throughout the day allowing me to close my position nicely in the afternoon. But would I have liked more? Absolutely. But it is an undeniable fact of the market: illiquidity means little stock available, and that in turn increases volatility when there is a catalyst. You can rarely have it both ways.
Ferrexpo (FXPO) on the other hand is a stock that is as liquid as you like. You would need deep pockets (or certainly deeper pockets than mine) to struggle for liquidity in Ferrexpo. Liquid stocks tend not to move much, but if there is a significant reason for them to do so there can be large moves, as we have seen in recent weeks.
Looking to Chart 2, we can see that Gulf Keystone formed a similar pattern to Chart 1. It’s a cup and handle only with a much deeper handle. However, look at the arrow on the bottom in the volume. You’ll see that volumes in the stock suddenly spiked. This also appears to have marked the bottom as the high volume continued and the stock continued to rise. The stock eventually broke out of the trendline, retested, and continued. I exited my position recently, and I am looking to go long again. I have marked the top arrow and previous high as a breakout entry. Ideally, I want to see some sideways action in the stock to let those in profit be replaced with firmer hands (or diamond hands as WallStreetBets would call them!). This decline in volatility over an extended period usually sees stocks react with greater volatility once the next move is in play.
It is worth noting that Gulf Keystone Petroleum is cheap based on its potential cash generation, but this is because the company operates in Kurdistan. I think it’s fair to say that when the Covid restrictions end there are few people that will be rushing to go there on holiday. If you can handle that risk, I believe there is further upside in the stock and would test this with a breakout long entry at 157p.
