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  • Major US bourses recovered some of Wednesday’s losses as investors saw an opportunity to buy the dip.
  • Short-squeeze stocks such as GameStop dropped as the retail traders who had pumped them faced brokerage restrictions.

US equity markets recovered on Thursday, the S&P 500 and Dow Jones Industrial Average rising 1% and the Nasdaq 100 rising 0.7%. Stocks did slip from session highs into the close, however; the S&P 500 managed to climb as high as the 3830 mark, but resistance in the 3820s sent the index back beneath the 3800 level again to close in the 3780s. The Dow and Nasdaq 100 saw similar price action. Amid the recovery in stocks, the S&P 500 VIX dropped 7 points back to just above 30, back sharply from its highest levels since the November 2020 US Presidential election.

Several institutional desks reaffirmed their bullish outlook for the US stock market over the medium & long-term prior to the open of trade on Thursday and this may have spurred some dip buying; strategists noted that the major fundamental factors that have supported the record-breaking rally in US stocks from March 2020 lows to current near all-time high levels remain largely unchanged; 1) real yields on US and international debt markets remain at historic lows as a result of ultra-accommodative monetary policy at most major global central banks, meaning TINA remains in place (an acronym meaning There Is No Alternative to investing in equities if you want to get a decent yield) and 2) though facing hiccups, mass vaccination programmes are underway in major developed economies, meaning an aggressive post-pandemic global economic recovery is still very much expected to begin within the next few months.

Analysts also suggested that the stock market recovery might have had something to do with an easing of pressure on some of the short-selling hedge funds that had been caught out by the recent surge in the most shorted small-cap stocks; to the despair and anger of retail traders, politicians, the FinTwit crowd and more, a number of popular retail brokerages restricted trading on retail darling stocks such as GME and AMC. With retail traders now unable to continue pumping the stock, prices sharply dropped (GME closed the session down 44%). Allegations of Wall Street corruption and cooperation between the retail brokerages and hedge fund managers aside, the move lower in prices will have eased the margin requirements on hedge funds that are holding onto short positions, reducing the need for them to potentially liquidate long positions in other large-cap stocks that might have weighed on the broader market.

That’s not to say (from the perspective of the hedge funds) that the battle is won and that GameStop and other similar stock prices will now drop back towards zero where they “belong”; the political fallout is likely to be fierce (US politicians on the extreme left and right were agreeing with each other on Twitter on their opposition to the restrictions that retail brokerages placed on retail traders on Thursday) and may well result in tougher regulations on either retail trading (less likely) or hedge fund activities (more likely). Many are calling for a ban on the practice of going short, which by itself would arguably be a strong positive for the stock market on the whole.