Short Sale versus Fed Policy
So today, while the market closed at record highs, most of the talk was all about Avis (CAR). It had fabulous earnings but that alone did not explain it soaring from $173 at the open to $545 only to fall back to a mere $357 at the close, a 108% gain. It was probably a short squeeze, that is some professional investors had borrowed the stock expecting to return it to the owners at lower price (pocketing the difference). If there is a sudden rise in the price, they will have to hurriedly buy the stock to limit their losses. If the people who own the stock, do not sell, (HODL or Hold on for Dear Life) then the price gets driven up in a frenzy as professionals try and but enough stock to meet their obligations. We saw it with GameStop and now with Avis and after hours today with Bed Bath and Beyond (BBBY).
Squeezes are interesting to watch and temp a lot of traders. It is like a game of musical chairs and it is great to play until you are left without a seat (or your cash). Credit to the Reddit traders that seem to be cracking this nut, but something about it feels off. Maybe its just jealousy on my part but I tend ignore the hoopla and look instead to the real world. For example, Avis had a great quarter because there are no cars to buy (chip shortage as you may have heard). People that have left the city need to get around and Uber Black is a tough ask in the suburbs. So there is a lot of demand, few cars and any rental car agency is going to do exceedingly well - something that will not last. Avis will fall back to earth. Will I short it then? No. I don’t play high risk games.
What I do pay attention to is that tomorrow the Fed will discuss the outcome of their meeting and the market seems to be holding its breath. Conventional wisdom says the market has already discounted the Fed’s likely announcement that it will be decreasing its bond purchases. This represents a reduction in the historic levels of support the Fed has given the economy. This planned reduction has been very well telegraphed to the market. If things go well, the market will simply accept the change as a positive indication that the economy is strong enough shape to handle the reduction. If not, today could mark the highs for the year.
Mind you, the Fed is only going to be reducing the bond purchases. One tool in their toolbox. The real issue is interest rates, specifically the Federal funds rate, and they are unlikely to announce any changes there for months, if not years. These macro trends are not as exciting as short squeezes but will probably have more of an impact on your portfolio than the latest meme stock. Keep the big picture in mind when investing, and don’t get caught up in a fad.
Market Today: So today, while the market closed at record highs. It was driven by materials, real estate and IT. Healthcare struggled as did energy (do not give up on these) There were less trades than yesterday, did not close many of the calls I wrote yesterday as the market was up. Should be able to close some tomorrow as the market usually takes a breather after a record high. My Roku (ROKU) call worked as did my Moderna (MRNA) but otherwise a dull day. Did add Enphase (ENPH) to my trading option list and wrote energy puts (CVX and FSLR). 8.1