Dow falls greater than 500 factors on Friday, struggling its worst week since October amid the GameStop buying and selling frenzy
US stocks fell sharply on Friday, ending a rollercoaster week on Wall Street as retail speculative trading continued to unsettle the market.
The Dow Jones Industrial average fell 620.74 points, or 2%, to 29,982.62, the first time since December 14 that the 30-share mark closed below the 30,000 mark. The S&P 500 fell 1.9% to 3,714.24 as 10 sectors posted losses. The Nasdaq Composite was down 2% to 13,070.69 as Apple fell 3.7% and other big tech names slid.
All three major averages fell more than 3% this week, recording their worst week since October. In January the blue chip Dow and S&P 500 fell 2% and 1.1% respectively, and suffered their first negative month in four years. The tech-heavy Nasdaq achieved a month-on-month gain of 1.4%.
GameStop’s shares rose 67.9% after Robinhood announced it would limit purchases of the stock and other heavily abbreviated names after restricting access the previous day. Robinhood raised more than $ 1 billion overnight from its existing investors, in addition to leveraging the banks’ lines of credit to ensure the capital was there to start trading volatile stocks like GameStop again.
Investors are concerned that if GameStop continues to rise in such volatility, it could penetrate financial markets and cause losses at brokers like Robinhood and force hedge funds that bet against the stock to sell other stocks to raise cash.
There are also fears that the GameStop mania is a sign of a bigger bubble in the market, and that its dissolution could also create turmoil and hit retail investors hard. A number of lawmakers also called for an investigation into the chaotic trade. The Securities and Exchange Commission announced on Friday that it will review the regulated agency’s actions to see if the decisions have affected disadvantaged investors.
“There is far too much leverage in the system and we are beginning to see signs that this excess leverage is being handled in a way that creates headwinds for the stock market and other risk-weighted assets for more than a few days.” “said Matt Maley, chief marketing strategist at Miller Tobacco.
Meanwhile, new trial results of Johnson & Johnson’s coronavirus vaccine disappointed some investors as it was less effective with some variants and also hurt market sentiment.
J&J said its single-dose vaccine had shown an overall 66% effectiveness in protecting against Covid-19. The vaccine was 72% effective in the US, 66% in Latin America, and 57% in South Africa at four weeks. However, the vaccine provided full protection against hospital stays related to Covid. JNJ’s shares were down 3.6%.
Stocks had rebounded to hit record highs in hopes that vaccines against Covid would be effective to allow for a smooth economic reopening before the end of the year. New mutations that are more resistant to vaccines could improve the bright outlook for investors.
Volatility increased this week as the retail frenzy kept Wall Street on the sidelines. The Dow lost more than 600 points on Wednesday and suffered its worst sell-off in three months. Then the blue chip benchmark rallied 300 points on Thursday amid a broad market rally. The Cboe Volatility Index, known as VIX, jumped above 33 on Friday.
The market also saw its highest trading volume in years as the mania heated up. On Wednesday, the total market volume reached more than 23.7 billion shares, surpassing the level at the height of the financial crisis in 2008. On Thursday, there was also extremely strong trading with more than 19 billion shares that changed hands.
A wave of retailers motivated each other on the red-hot WallStreetBets Reddit forum to pile into the most hated names of hedge funds, resulting in massive short-bruising of stocks. GameStop is up more than 1,600% in January, while AMC Entertainment is up over 500% this month.
Billionaire investor Bill Gross was alarmed by the growing speculative mania this week in his investment outlook released on Friday.
“This apparent burgeoning crisis calls for regulatory and mainstream media warnings of the dangers this week, both for overall markets and for individual investors,” wrote Gross.
However, some believe that the overall market impact should be limited for now, as retail volume is concentrated on just a handful of names.
“While we believe there will be more pain, we remain optimistic that it will likely stay local,” said Maneesh Deshpande, head of equity derivatives strategy at Barclays. “Long-short hedge funds have relatively little market exposure, which indicates little impact on the overall market due to deleveraging.”
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