Meme stocks are roaring again. This time may be different
NEW YORK — NEW YORK (AP) — Meme stocks are shaking Wall Street again. That shouldn’t be such a surprise.
Ever since groups of small and novice investors took the stock prices of downtrodden companies to breathtaking heights three years ago, the potential for more flare-ups has been clear.
Some things are different this time. The biggest change from the original supernova for GameStop stock is how the experience of 2021 makes this all feel familiar. That familiarity, plus some changes in the market, should allow Wall Street to digest the moves more easily without risking the overall system, experts say.
GameStop in 2021 put the capacity and resilience of securities markets to a test that “few could have anticipated,” U.S. Securities and Exchange Commission officials said in a report later that year.
But some things definitely stay the same. Chief among them is the risk of losing everything that comes with the potential to make quick money playing such volatile stocks. Here’s a look at what’s going on:
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WHAT IS GOING ON?
GameStop, the granddaddy of meme stocks, has risen suddenly and sharply. It was up nearly 37% on Tuesday afternoon, after rising 74% the day before. Other pandemic-era meme stocks are moving just as radically. AMC Entertainment, the cinema operator, rose almost 31% on Tuesday.
SHOULD SHE RISE SO QUICKLY?
Financial analysts and professional investors who are primarily interested in figures such as profits, cash flow and interest rates would say no. GameStop’s financial outlook didn’t change over the weekend, before the dizzying rise in its stock price. The video game retailer posted a small profit in its most recent fiscal year after five years of big losses and significant cost and job cuts.
Then what caused it?
A burst of momentum caused by buyers. Conventional wisdom says that a stock should ultimately settle at a price that reflects how much money the company generates, where interest rates will follow and other factors. But in the short term, a stock’s price is determined by how much investors are willing to pay for it. And people, at least for now, are willing to pay much higher prices for GameStop shares.
YOU HAD TO SAY ROARING KITTY THERE, NO?
Yes, the spark that got the momentum rolling may have been a person nicknamed Roaring Kitty. He was a central character in the first wave of GameStop, famous for wearing a red bandana and speaking bluntly. He gathered other buyers as he professed how much he loved the stock on YouTube, on Reddit’s WallStreetBets forum, and even in his testimony before Congress. GameStop’s stock price skyrocketed more than 1,700% in the first few weeks of January 2021,
WHAT DID ROARING KITTY DO THIS TIME?
After being inactive since June 18, 2021, the X account for TheRoaringKitty posted a meme on Sunday night. The photo shows a person playing a video game moving from a lying position to an upright and alert position. Many social media users took it as a signal, and soon the forums were buzzing with people saying they were buying GameStop. That quickly gave way to screenshots that people said showed how much profit they made trading GameStop.
HOW CAN THE RESPONSE BE SO FAST?
This is the new era of investing, where anyone can buy a stock without commission, just by tapping a phone a few times. It is the result of years of innovation. At every step in the process, consumer advocates praised the broader playing field, allowing more people to invest in stocks and build wealth. But they also warned that easy access could encourage people to act too quickly or too hastily.
HOW MUCH REACTION HAS REALLY BEEN? Is it all exaggerated?
It was manic. GameStop’s stock price fluctuated so sharply after the opening bell Monday that the stock was halted nine times in just over an hour. On Tuesday, moves were even wilder for AMC Entertainment, with trading halted eighteen times by early afternoon.
HOW DOES THAT COMPARE TO 2021?
It’s not that big. On Monday, investors pumped a net $15.8 million into GameStop, along with $37.5 million into AMC, according to data from Vanda Research. That compares to $87.5 million and $170 million in 2021, respectively.
“Do we think more retailers could jump on the trend in the coming days? Yes,” said Marco Iachini, senior vice president at Vanda Research. “Do you think this is a repeat of 2021? No, and the chances of us reaching that stage are slim.”
Large hedge funds and other professional investment firms are better equipped to handle the situation this time, he said, and they could ride the wave with small investors before trying to exit the trades ahead of them, leaving the smaller investors can remain. Investors in their wallet who bear the risk.
WHAT ELSE IS DIFFERENT?
Meme stock companies have traded more shares in the market than in 2021, which could reduce the likelihood of a so-called “short squeeze,” according to Nick Battista, director of market intelligence at palatablelive, a streaming network aimed at options traders. .
A short squeeze is a relatively rare event that can produce eye-popping profits for those riding the wave. When investors bet that a stock’s price will fall in the future, they “short” the stock by borrowing shares and selling them. Later, if the price does indeed fall, the short sellers can buy the shares, return the borrowed shares and pocket the difference.
But when a heavily shorted stock quickly rises in price, short sellers may rush to exit their trades. The only way they can do that is by buying shares of the stock, which can start a self-feeding cycle that pushes the price even higher.
Such a short squeeze likely contributed to GameStop’s electrifying rise in 2021, but SEC staff said it was a small portion of overall purchases and that GameStop’s shares remained high even after short sellers exited their trades .
GameStop had about 305.9 million shares traded on the market in March, more than four times the number of shares it had in March 2021. Such growth “significantly increases the amount of activity needed to move higher” for GameStop and other meme stocks. Battista said. ‘Can they move up? Sure, but it will be a more difficult task this time.”
WHAT ARE THE RISKS OF PARTICIPATING?
It’s important to know that momentum can shift the other way just as suddenly. It took just four weeks in 2021 for GameStop shares to go from under $5 to over $120. But it needs to touch that price again. Even after the big jump in recent days, GameStop shares can still be purchased for around $42.
Or just look at Tuesday’s trading. GameStop quickly doubled more than $64 in the morning before giving back much of its gains in afternoon trading, falling to $41.67.
After briefly hitting $390 in the summer of 2021, AMC stock fell below $3 last week. It’s almost $7 now.