U.S. stocks fell sharply on Wednesday amid disappointing earnings, while concern about heightened speculative trading activity deepened.
Intensifying speculative behavior among retail investors is causing concern. Heavily shorted names, including GameStop and AMC Entertainment, continued to be pushed higher by amateur day traders in online chat rooms. Some investors are worried about mounting losses by hedge funds spilling over to other areas of the market as those funds sell other securities to raise cash. Investors are also concerned the speculative behavior is a sign the market is overvalued and a pullback is near.
Stocks fell as a “surge in heavily shorted stocks like GME and others [is] creating substantial margin calls for funds short these positions,” said FundStrat’s Tom Lee in an email. This “forced selling” by hedge funds is causing a bit of turmoil in the markets and likely leading all active managers to get into a risk-off mode, Lee said. A margin call is when a broker mandates an investor hold more cash to cover losses.CNBC Stock market today: Dow sheds 600 points in biggest drop in 3 months, S&P 500 turns negative for 2021