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Stock Market Crash, Market Rally and Short Squeeze: What’s Going On?

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Analysts have been anticipating a crash based on several macroeconomic and industry events. But the stock market has nothing but surprised even the likes of Warren Buffett, who spent his entire life (more than 70 years) making money from it. The last 12 months have been the most unpredictable in the stock market. Does this mark the era of new-age investors?

The 2020 stock market recovery 

Let me take you back to the March 2020 market crash induced by a global lockdown in several countries. The market crash was justified as the cloudy future created panic among investors. But then, the stock market reported its fastest recovery from a macro crisis. This recovery was backed by the tech stock rally and the fiscal stimulus money the governments gave to individuals and small businesses.

The stock market did not reflect the state of the economy. So billionaire investor George Soros anticipated that the free stimulus money created a tech bubble that will burst once the cash benefits end. I will still hold that thought that a second stock market crash could come.

Where is the money coming for a short squeeze? 

In November 2020, the vaccine uplifted hopes among investors and boosted the price of pandemic-hit stocks like airlines, oil, and real estate. But 2021 started with a note of caution as the second wave of the pandemic faded the vaccine effect.

Analysts were expecting the year to start slow as the effect of the mutant virus and vaccine rollout created uncertainty. Then in the third week of January, a handful of poor performing stocks gathered momentum. BlackBerry, which was removed from the TSX 60 Index in June 2020, suddenly jumped 270% in two weeks of January. Neither the analysts nor the company executives knew what is driving this rally.

Later, the mystery unfolded as rookie traders assembled on Reddit, and the subreddit r/WallStreetBets drove this rally. They used BlackBerry, Gamestop, and a few more stocks as bait to force hedge fund investors to reduce their losses through the short squeeze. No matter the macro conditions, hedge funds have a pile of cash to invest in the market.

But the question is from where did retail investors get the money? They could have encashed some of their profits from last year’s tech stock rally or used some of their stimulus money. But the Depository Trust & Clearing Corporation (DTCC) was doubtful whether retail investors will be able to pay for the Blackberry stocks they are buying. Hence, it asked brokers like Robinhood to increase the margin. Robinhood blocked Redditors from buying BlackBerry stock for one day, which reduced its price by 40%.

What happened to the second stock market crash? 

All the unpredictable market moves are happening when there is stimulus money. The Justin Trudeau government will end its benefits for individuals in September. But those who are continuously taking the Canada Recovery Benefit (CRB) will exhaust it in April. That is also the time you have to pay your taxes.

If Soros is right, a correction or maybe even a crash could come in April. This time, the government will not extend the benefit unless the second wave of coronavirus creates another nationwide lockdown. BlackBerry will be the hardest hit from the crash.

Should you invest in BlackBerry stock? 

Note that the BlackBerry stock rally is not because the company hit a jackpot, but because it is the bait in the Redditors versus hedge fund war. As retail investors shift their target to silver and Bitcoin, they will cash out from BlackBerry. Hence, BlackBerry stock fell 11% at the start of the trading session.

Buying BlackBerry stock at this point is like burning cash. The stock will fall back to its normal trading price of $10 or lower. If you ask whether to buy the stock at that price point, I will keep a note of caution. The company has been making losses for several years. Although it has a good cybersecurity portfolio, it is yet to show continued revenue growth.

Canada’s Warren Buffett Prem Watsa has invested more than 10% of his portfolio in the BlackBerry stock as he sees potential in it in the long term. Instead of timing the stock, give the stock time. It is a good long-term buy at a price point below $10.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. David Gardner owns shares of GameStop. The Motley Fool recommends BlackBerry and BlackBerry.

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