Activist short-seller Carson Block, the founder of Muddy Waters Research, says the "markets are broken," and it's causing investors who traditionally focus on the fundamentals to have to trade on the technicals.
“They were broken before GameStop (GME), but GameStop and these meme stocks just show how broken they are now. Now, the reason they're broken is because fundamentals matter less and less every day,” Block told Yahoo Finance Live on Wednesday.
While it's a confluence of factors that brought markets to this point, Block noted that the result is so much of the institutional and retail investing world is dedicated to understanding technical aspects instead of the fundamentals.
“‘What's the float? What are flows into the stock from passive going to be? What is the gamma embedded in the options that are outstanding?’ This is not asking the question the markets are designed to answer, which is, ‘Which companies are going to take capital and create value?’ And when we're past that tipping point, it's kind of fair to ask, ‘What's the point of these markets?’”
According to Block, adapting to these markets means an investor has to consider the technicals like the flows.
“[You] might hate the game, but if you're going to be in the game, you have to play it,” Block added.
In the third quarter of last year, he said that his firm was getting squeezed on a short he's asserted to be “near-total fraud from China” and what was the stock driven much more by technicals than fundamentals.
“We basically said, ‘OK, we have to be very nimble as traders.’ Normally, that's not what we do. Previously, we didn't have anybody who would stare at the screen all day and see how things are moving tick by tick, but we had to hire a full-time trader and just be ready to move our positions around. It's unfortunate that fundamental views are not as important as they used to be, but that's how you adapt. You have to trade and be smart to the technicals.”
A 'bloodlust' for short-sellers
Block, best known for unearthing and shorting fraud in publicly-traded Chinese companies, recognizes that "there could be bloodlust for short-sellers" following the Reddit-fueled retail trading frenzy that drove up shares of GameStop to astronomical levels, burning hedge funds shorting the video game retailer's stock. The stock, which closed at $89 on Wednesday, had traded as high as $483 during the Reddit frenzy.
“[As] I said earlier, be a lot more attuned to the technicals. So, if something is already heavily-shorted or borrow is heavily utilized, that's going to be off the board for right now. We'll probably hedge with out-of-the-money call options, our positions. We just have to trade a lot more nimbly,” he said.
Block added that if something on social media gains traction and retail investors are looking to “jam the stock up,” his firm would cover that short. He also might play into that frenzy and then re-short the stock.
“Hell, we might even go long for a few minutes or for a few days just to say, ‘Hey guys, you know, when you do this we're actually going to try to profit off that and then re-short the stock. So, maybe rather than being emotional about this, everybody should try to be a little bit clearheaded, listen to the arguments we're putting forth. You don't agree with them, you want to stay long the stock, you want to buy the stock, great. But if you're going to try to target us just because we're saying things that are not nice about a given company, well, then you know, we're gonna protect ourselves and possibly even look to capitalize on that kind of insanity.’”
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.