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Chart Advisor: Uncertainty Lingers

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Thursday, June 17th, 2021

1/ Small-cap investors divided 

2/ AMC attracts traders and investors 

3/ GME stuck on support after earnings 

4/ The bottom line

1/ Small-cap investors divided 

The iShares Russell 2000 ETF (IWM) had a heavy sell-off this morning following the Federal Open Market Committee (FOMC) announcement on Wednesday. The ETF plummeted nearly 3% in the first two hours. Following this sharp drop, IWM was able to find support at the  200 period simple moving average in confluence with a support level at 224.50 as seen on the 1-hour chart below. It had a quick recovery from its lows, but still closed nearly 1% lower for the day. 

Overall investor sentiment is weakening somewhat. Investors seem to be divided on their views about the effects of a strong dollar on the growth of small-cap companies. On the one hand, those investors who sold early in the day might be worried the Fed is moving too quickly. They seem to fear that strengthening the dollar during this economic recovery is a mistake. On the other hand, those who stepped in to buy at key support levels see this as a natural progression that must be made on the road to recovery.  

What today’s move makes clear is that investor ambivalence is likely to continue for the weeks ahead, which may lead to range-bound movements on the broad market indexes. That may lead more aggressive investors to seek out even higher risk opportunities. 

2/ AMC Attracts Traders and Investors 

One area for high-risk and high-opportunity trades is the so-called meme stocks. These often start as low-priced, highly shorted stocks that users of online forums such as Reddit’s WallStreetBets rally behind. Lately, they have become some of the most heavily traded and volatile shares around on any given day. Although the stupefying gains by meme stocks this year have been fascinating, they don’t make sense from a fundamental standpoint. 

One of the foremost of these stocks is AMC Entertainment Holdings (AMC). The company reported its earnings on May 6, where it missed its first quarter non-GAAP earnings of -$1.42 by $0.04, and GAAP earnings of -$1.42 by $0.08. Revenue of $148.3M (-84.2% year-over-year) was also missed by $9.38M. However, the price has trended wildly higher since then. 

The surging share price translated into tangible results for the company. After all, AMC recently saw its credit rating upgraded by S&P after using Reddit-fueled share offerings to raise capital and make a debt restructuring program less likely.  

3/ GME Stuck on Support After Earnings 

GameStop (GME), the flagship of the meme-stocks, is up over 1,500% in 2021. The Grapevine, Texas-based video-game retailer fell 27% to $220.39 on June 10, after its earnings report was announced, creating the biggest drop since March 24. News that GameStop may offer another 5 million shares, and that past trading activity is being investigated by the Securities and Exchange Commission, is also weighing on the share price.  

Interestingly, AMC and GME are the largest two holdings in iShares Russell 2000 Value ETF (IWN). The two have a combined weight of 2.1%, despite the fund holding 1,495 companies. These numbers may seem small, but with the market currently in a low volatility environment (VIX below 20), every blip that impacts returns is meaningful. Even a 2% weighting could have a ripple effect on other small-cap stocks. 

4/ The Bottom Line 

IWM’s big drop today was partially mitigated by the close, demonstrating that investors are divided by the effect of the current environment on small-cap stocks. That may drive some investors to look more closely at the likes of GME and AMC shares. 

Originally posted on 17th June, 2021

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