Most of the wealth assets that bet against Gamestop and other Reddit-backed stocks had to reduce the effect of the stock mania on the hedge funds. This led some of them to raise capital to offset their low margin calls.
They raised this capital by selling highly-priced stocks such as Apple (AAPL), Tesla, and Amazon (AMZN). These stocks are highly valuable, and we're immediately bought by other hedge fund managers. The buying and selling of stocks on both sides have created a negative feedback loop.
US stocks bounce back
As predicted, US stocks bounced back as the value of GameStop's plunged sharply. The S&P 500 grew by 1.6%, its best daily gain since November.
In a note written by Goldman Sachs strategists to explain the stock mania, they said that the "actions in a small part of the stock exchange market have the power to create a large market problem down the road if left unchecked".
Their prime service arms which provide consultancy services to other hedge funds said that the previous week was the biggest sale of stocks by hedge funds since the Great Recession that transpired in 2009.
The analysts also added that hedge fund net and gross disclosures are currently at their highest and that stock selloffs are expected to happen.
Recent stock market trends are an indication that the selling frenzy is not stopping anytime soon
Charlie McElligott, the managing director at Nomura Securities warned that "volatility metrics show that more stock selling is going to happen".
Goldman Sachs strategists believe differently and have said they are confident about their stance concerning the US stock market. They predict that S&P 500 will end 2021 at a 14% gain.
They explained their stance by saying that the performance of the stock market-after short squeezes like the GameStop saga- will be regulated by the economy.
The company also said that as economic growth economic improves to the coronavirus rollout, stocks like S&P 500 will perform well, adding that investors have no reason to worry as long as growth remains the crucial force behind stock prices.