Dow jumps 200 points, rebounding from its biggest drop since October

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Futures tied to the S&P 500 climbed early Thursday following a sharp sell-off in the stock market the day before.

S&P 500 futures traded 0.7% higher. Dow Jones Industrial Average futures rose 200 points. Nasdaq 100 futures gained 0.6%.

Futures rose to their highs as GameStop, a highly speculative name that had rocketed higher amid retail buying frenzy, started to roll over.

The brick-and-mortar video game retailer, a target on the WallStreetBets Reddit chat room, had risen as much as 40% in premarket trading and quickly wiped out those gains. The stock started dropping as word of broker restrictions began to spread. Interactive Brokers and Robinhood have limited transactions for heavily shorted names including GameStop and AMC Entertainment.

GameStop last traded 20% lower, while AMC dropped 34%.

Wall Street suffered steep losses on Wednesday, with the S&P 500 and the Dow posting their worst day since October, as the speculative buying frenzy in heavily shorted stocks kept investors on edge. Some fear that hedge funds being squeezed could be forced to reduce their equity holdings to raise cash. Others called it a sign of a bubble forming in the market.

“This market action is nothing more than another epic parabolic bubble that has been going on since the history of time,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note. “This is not investing. This is not planning for one’s retirement with a diversified portfolio. This is not prudent analysis of stocks… And these traders forget that buying a stock is buying a piece of a company but instead they are just speculating on a stock symbol in the ultimate game of hot potato.”

Trading volume exploded amid the retail buying spree in the previous session with 23.7 billion shares changing hands, marking the heaviest trading day since at least 2007. On Wednesday, U.S. equity option volumes hit a record 24.5 billion shares and 57.1 million contracts, according to Piper Sandler.

“Short squeezes causing implosions in some hedge funds are joining SPACs, IPOs, and bitcoin as data points supporting a market bubble thesis,” Scott Knapp, chief market strategist at CUNA Mutual Group, said in an email. “This is a time for caution for investors.”

Apple turned in its largest revenue on record at $111.4 billion in its fiscal first-quarter earnings report for fiscal 2021. Sales for every product category rose by double-digit percentage points. Shares of the tech giant, however, dipped 2% in premarket trading.

Tesla dropped about 5% in premarket trading after the electric car maker posted worse-than-expected earnings for the latest quarter. The company also said it expects annual average delivery growth of 50% going forward.

Shares of American Airlines surged more than 40% in premarket trading Thursday after the carrier posted better-than-feared quarterly results. The company, the most-shorted U.S. airline, saw it shares keep ripping higher as hedge funds and other short sellers rushed to buy shares to cut their losses.

On the data front, dross domestic product increased at a 4.0% pace in the fourth quarter, slightly below the 4.3% expectation from economists surveyed by Dow Jones.

The number of first-time filers for unemployment benefits rose less than expected last week. Jobless claims totaled 847,000 for the week ended Jan. 23, the Labor Department reported Thursday. Economists polled by Dow Jones had expected first-time claims to total 875,000.

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