For investors: how to detect “uppercut” maneuvers (short position) in the market

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

Ámbito Financiero – A few days ago many were amazed how a group of no more than 2 million young millennials, small investors, managed to give a spectacular blow, an uppercut, to the large bearish Wall Street funds such as Melvin Capital and Citron Research.

First, in order to understand what happened, it is necessary to define the notion of “short position”. A short position is a concept that is used in finance and is when declines are expected in the stock market. The investor rents a share, paying a kind of risk premium as if it were a rent, knowing that it will go down in the immediate future. In this way, when he comes down, he will buy it, return it to whoever had rented it and he will keep the difference. For example, he rents a share for $ 20, sells it, and waits for it to drop to $ 2 to buy it and return it to him once the contract expires; the difference is the profit that the investor keeps. Obviously, he wins only if that stock goes down (that is assumed because it is believed that that company is going to fail). If he raises that stock, he loses.

This is what happened in the case of Game Stop, a company that had had many problems for some time. As a result of the confinement and social distancing measures carried out in the different countries, a process of transformation of preferences on the part of consumers in the video game market was accelerated. Game Stop is a company that sells video games in physical form and with the technological revolution of recent times, people began to turn to downloading video games online. Obviously, facing a year in which people could not move, the process accelerated.

Faced with the prospect that the company was not going to be able to adapt to this new change either, Wall Street’s bear funds began to rent this type of shares and sell them, with the aim of buying them at a lower price and making a difference. While initially the perception was that these stocks were down, the short positions of large funds further pushed the trend down.

Everything was going well until Reddit, a forum for young millennials who share investments, began to buy those shares. Thus, supply and demand, the value of that share rose by 1,600%. So now those who sold a stock expecting it to go down, it actually went up and the loss increased. It should be noted that when stocks rise sharply, funds that have bearish investments in them must close their position to cut losses. To do so, they had to buy those shares, and that made Game Stop’s shares rise.

The Game Stop case marked a clear example of individual sovereignty in two senses. On the one hand, for the first time a market driven by the inertia of bearish funds, was marked by the new players: the individuals that make up the Reddit Forum. Another similar case of the power of this forum is what happened in recent days with the 800% rise in Dogecoin, a cryptocurrency that now thanks to Reddit could reach US $ 1, a fact that would be historic. This group invites investors not to sell and they continue to press for the price of this cryptocurrency to continue rising.

Countless times we hear that markets are only moved by large players and that nothing can be done about this. I believe that with this case we must become aware that, on the contrary, the power that each one of us has is crucial. Ultimately, the market is a whole made up of individual players.

The New York Times

On the other hand, despite the decision of a small group of investors, the preferences of the majority of the people prevailed. GameStop shares listed on Wall Street fell 60% to $ 90 a few days later. It was a fact that the company did not know how to adapt to the new demands from the public and that, even though a group of investors began to buy its shares, it was not going to prevent said company from continuing its downward path.

Beyond that it is going to become an anecdotal fact, the truth is that it reflects the ability of the individual to move the hands of the clock in one direction or another. Nothing is outside the reach of the individual, it is he who has the ability, through his market decisions, to define the future of each of the world’s economic actors. Therefore, it is time to stop being taxpayers to understand our position of power within the market. Nothing is more powerful or powerful than the individual in action.