It happens every working morning now, between 4 a.m. and 6 a.m. ET, the adoption of a couple of stocks, hijacked from their closing price and gunned so hard that you have to wonder exactly what kind of game is being played. Some of the time the stocks are oddball biotechs, the kinds that just got approval for a mid-stage trial for some illness that, thank heavens, you’ve never heard of. Sometimes they can be stocks with news that we don’t know about yet, typically leaked downgrades or upgrades from brokerage houses. We’ll never know how the leaks were obtained and by whom. We just know it’s nefarious. But then there are the kinds of stocks that have become the staple of the 4 a.m. to 6 a.m. crawl, as we call it, that stream of stocks and prices that goes across the bottom of the CNBC television screen. Each subsequent tick seems a little higher than the previous print. It’s as if something is going on at that very moment, and there are people who are furiously trying to get in before everyone knows about the good news. There’s only one problem: There is no news, good or bad. People are just buying these stocks to foment some sort of activity, one we can’t seem to grasp. We aren’t in on the joke, or the contest, or the riches. Who insists on getting in some D-Wave Quantum or some Rigetti Computing at 4:12 a.m. in a fashion so aggressive that it looks like they are actually trying to move it up? That’s what they must be doing because, at that ungodly hour, it’s highly unlikely what we call “natural” sellers, or actual shareholders, are around to make sales. You have to be thinking, What the heck is their game? I have been thinking about this kind of buying ever since I first saw it during the GameStop affair. The video-game retailer is the quintessential stock that, back in early 2021, changed the lives of so many traders and not necessarily for the better. That curious beast caught fire four years ago for no particular reason other than a handful of people realized that the system is flawed. We always hear that you can buy or sell or short a stock, and we act like the mechanics are all the same. But that’s simply not true. When you buy a stock, it’s sent to you. When you sell a stock, you send it to them. But when you short a stock — a bet that it’s going to fall in price — you have to search for shares in that stock, locate them, and then you can sell them as if you are pretending they are yours. But those shares are not yours and never will be. As long as you are short that stock, you will always have to be worried whether you will still able to borrow it because there are no guarantees that you can. A nagging feeling always stays with you. You see the stock going higher and wonder whether this will be the time where you’re going to get in a jam, a short squeeze, when your broker calls you and says he is sorry but he can’t locate any more stock to keep your short on, so he is going to have to buy you in, closing out the trade. Ah yes, the dreaded “buy in.” The short gone awry because so many people have borrowed it and shorted it that there is none left “in the vault.” When that happens, an actual buyer won’t get stock unless you give back the stock you were loaned. Of course, it’s not up to you. If you don’t close it yourself, your broker will buy you in at any price they want to. It says they can do this right in the contract you never bothered to read. RGTI QBTS 6M mountain Shares of Rigetti versus D-Wave over the past six months. Until you have been bought in, you do not know what it can feel like. You have lost any control over the position that you are short. It’s been handed over to others, out of your control. There can be no plan, no map. Just a sense that you are about to lose a tremendous amount of money. You just don’t know how much. You just want someone to send you the bill to get it over with. But it lingers and lasts as your broker tries frantically to avoid what almost always turns out to be the inevitable, the closed short at some unfathomable price. You put on the short and you got beat, not necessarily by someone who is smarter than you about the stock, but someone who is smarter than you about the process and gamed it — and you— perfectly. This potential scenario is always lurking, even if you are right in identifying a stock that is so hideously overvalued that being short would make sense. Back when many banks were failing in 1991, I was short an institution that had a branch just down the block from me. I had done the research. I knew it had a ton of bad loans. The darned thing was teetering. So, I asked my broker to locate 50,000 shares, got the borrow and sold it short in the mid-teens per share. Two days later, with the stock trading up into the high teens, I got a call from the same broker. My borrow was no good. Couldn’t locate the stock. Didn’t matter that I had gotten a locate earlier in the week. If I didn’t find the stock somewhere else, they would buy me in. I called everybody. Nobody had any. Next thing you know, I see that I bought 50,000 shares around $30 apiece. Huge loss. I complained. I screamed. Nothing mattered. But that wasn’t the most galling thing. A week later, the bank collapsed and got seized. The stock was worthless. That was supposed to be the case with GameStop, an awful retailer whose time has come and gone, worse than a Party City or a Big Lots or a Bed Bath & Beyond. Actually, it was much worse than a Bed Bath because you might actually have gone to a Bed Bath. It was has hard to think of a reason to go into a GameStop. Can you imagine a poorly run store chain selling something that’s easier, faster and cheaper to get by staying home and simply downloading it? However, thanks to the ridiculous process of short-selling — one that I often think shouldn’t even exist because the mechanics are so hopelessly stacked against you — Gamestop, the stock, detaches itself from Gamestop, the enterprise. The stock is free to roam to the stratosphere on the backs of the shorts who have had their borrows taken away. That’s what I think we are seeing each morning with whatever stocks that are being gunned that day. That’s what I think we are seeing with the quantum computing stocks, a group that become red hot last month after Alphabet’s Google announced a breakthrough in that emerging technological field. The gaming of the players, not the game. Ever since the GameStop meme trade in 2021, there’s been a pervasive desire to win by causing someone on the other side of the trade to lose. I think that by taking up a stock, these buyers are attempting to get the next GameStop going. I believe they are actually trawling for short-sellers, creating excitement with the idea that somehow someone bold will say, “Wait a second, there is nothing going on with Rigetti Computing, I will sell that stock short up two bucks in the premarket to an under-capitalized wise guy and cover at 9:30 a.m. ET when sellers come in and it opens flat.” Seems like easy money: $2 a share in five hours’ time. Seems like very easy money. There’s nothing going on at Rigetti during the daytime, so there can’t be much going on at 4:30 a.m. ET. But once the short is laid down, say 500 shares at $12 apiece, the stock doesn’t stay still. It doesn’t top out. The buyers just keep buying, taking it up as far as it can go until — until what? It’s not like there will be any real sellers at that hour. They just keep buying and buying, and the only supply is from knuckleheads who figured that no buyer is going to keep taking it up much further. Doesn’t the buyer have to lose money? Won’t real sellers come in soon? Not so fast. That early in the morning is the easiest time to walk a stock up. You can keep taking stock until that short seller — the one who sold 500 shares short up two bucks — panics, fearful that there may actually be something happening. We all know the pain those short-sellers in GameStop felt when they saw the early morning buying and then no sellers appeared when you would naturally expect them to appear. Think about that before the sunrise as you see Rigetti shares levitating in the premarket, desperate sweat beading on your forehead, starting to soak your shirt collar, shaking your head as buying continues above where you sold it short. You start musing. Will today will be the day when Rigetti, whatever that is, gets a bid from a more established company, IONQ perhaps? Why not? Can those two be in talks? Is IONQ more real? Is it any better? Maybe today is the day when your broker can’t find you that Rigetti you shorted. Did Rigetti get a U.S. Army contract? Did Rigetti announce a partnership with Google involving the breakthrough Willow chip ? Is there going to be a rollout of fresh sell-side analyst coverage by some boutique firm? Who knows? Help! Meanwhile, Rigetti seemingly just keeps going up and up, like some sort of advertisement: Buy me, buy me, you will be sitting on a gold mine. Ever since the GameStop meme trade in 2021, there’s been a pervasive desire to win by causing someone on the other side of the trade to lose. Jim Cramer How long can someone take the pain of that stock going up after they shorted it? I don’t think all that long if the buyer, or buyers, just keep going. And so you end up not waiting for the opening bell. You capitulate, deciding to close out the short position, which requires you to repurchase the shares you previously sold short at whatever price the stock now trades at. And with that added buying pressure, you make the stock go higher still. You lost, and now so will others because it’s too hard to stay short something you know nothing about. This game can work because it’s asymmetrical. You can lose to infinity. Nothing stops at zero on the short side. Of course, there is no surety here. It’s entirely possible that you get that destructive event feared by any investor who is long the stock. Perhaps Nvidia CEO Jensen Huang says something skeptical about your industry, as he did this past week about quantum computing. Totally out of left field. You get crushed. Those are just the breaks of a real bad game. Indeed, Rigetti shares plunged more than 50% last week. The stock had been up over 500% since the start of December. One day we are all going to get up early, and there will be plenty of natural sellers at every tick up, making it difficult to gun up a stock in a manner that attracts wayward shorts. But we aren’t there yet. Until then, just watch this phenomenon. It’s unbelievable, and I can’t think of a more stupid way to make money than just beating up on people who know the company’s not worth the price the buyer is paying, but that’s irrelevant to the trade. A mea culpa on Constellation A word about Club name Constellation Brands , which tumbled 17% in Friday’s session in response to earnings . I have been trading and owning stocks since 1979. It never fails to sicken me when I see a stock fall like this with my charity money in it. What really happened here? Some of it is a management team that is way too bullish about its prospects without realizing — or being oblivious to — how poor performing their broader industry is. I should have realized that a company that lost billions on cannabis, wine, spirits and a failed brewery in Mexico shouldn’t be trusted. But I did because the cash flow was so darned strong. This thing was spewing cash, with reasons to believe even more cash that could be returned to shareholders was on the way. The odd thing about Friday’s stock collapse? Corona brewer Constellation actually raised its cash flow guidance. But it didn’t matter. A guide down on sales and operating income is deadly. This stock also got pulverized because its peers in the alcohol industry — like Molson Coors , Brown-Forman , Anheuser-Busch Inbev and Diageo — have shown earnings declines, and you aren’t going to pay a premium for Constellation’s stock if its earnings are going to go lower. Now, one can easily blame CEO Bill Newlands as he’s been apart of the decline, and he was still talking about declining employment for its key Hispanic customer base while the rest of the market sold off Friday because of improving employment. He’s still talking about a cyclical decline in demand when it seems like it could be secular considering the rise of GLP-1 weight loss drugs, while younger people are drinking less alcohol and and favoring cannabis alternatives instead. And now there’s a call to put a cancer warning label on bottles. I believed him, again, because of the cash flow. Still, it’s not Newlands’ fault. I think he’s a true believer. It’s my fault. Something is very wrong with this company, and yet I figured as long as the cash flow remains strong, the stock can stay up until the cycle comes back. I now no longer believe in the cycle. And as I said on Friday’s Morning Meeting, when the stock was “only” down 12 points, I also no longer believe in Constellation. (Jim Cramer’s Charitable Trust is long GOOGL, NVDA and STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Customers enter a GameStop store in San Rafael, California.
Justin Sullivan | Getty Images News | Getty Images
It happens every working morning now, between 4 a.m. and 6 a.m. ET, the adoption of a couple of stocks, hijacked from their closing price and gunned so hard that you have to wonder exactly what kind of game is being played. Some of the time the stocks are oddball biotechs, the kinds that just got approval for a mid-stage trial for some illness that, thank heavens, you’ve never heard of. Sometimes they can be stocks with news that we don’t know about yet, typically leaked downgrades or upgrades from brokerage houses. We’ll never know how the leaks were obtained and by whom. We just know it’s nefarious.
