A retail investor-inspired surge in the shares of video game retailer GameStop Corp (NYSE:GME) has left several short-sellers licking their wounds in what could be described as an unlikely victory for the ‘little guys’ of the stock market over the institutions.
At the end of Tuesday’s session in the US, shares in the firm surged to a record high of around US$148, despite the absence of any major news, while in pre-market trading on Wednesday the share have continued to climb and at time of writing are at around US$245, a 1,320% increase in value so far this month.
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Instead, the bull run seems to have originated on Reddit site r/wallstreetbets, which serves as an online hub for retail traders looking to exploit stock momentum to cash in.
However, in contrast to the old days of the market, which would often see retail collectives quickly swept aside by the larger firepower of institutional funds and established short-sellers, retail traders now have much better access to the market, swelling their numbers and by extension their ability to move prices.
The pile on also attracted the notice of several influential commentators yesterday, with Tesla Inc (NASDAQ:TSLA) boss Elon Musk, who seemingly tweeted his support for the retail day traders of Reddit by proclaiming “Gamestonk!!” and linking to the r/wallstreetbets forum last night.
OANDA’s Edward Moya pointed out on Tuesday that this new army of retail traders are “not focused on valuations, but rather by momentum opportunities they see from Reddit’s Wall Street Bets, Youtubers, [social media app] TikTok, or Robinhood”, and thus present a new factor for research houses to account for when estimating how a stock will perform.
“GameStop does not deserve a valuation over US$90, but that might not matter if influencers keep retail traders buying”, he added.
However, the emergence of what some would call a “mob” of retail investors has been a painful one for the short-sellers, with the rally in GameStop shares having cost them around US$3.3bn in lost bets so far this year, with US$1.6bn lost last Friday alone.
The resultant squeeze on the bears is also likely to have created a feedback loop for the rally, as those looking to cut their losses will have offloaded their stakes at market prices, thus bolstering the bull run.
The incident also showed a dark side to the retail investor phenomenon, with short-sellers such as Andrew Left of Citron Research saying he will no longer comment on GameStop after incurring the wrath of the community by saying the shares would drop to US$20 while also criticising the bullish buying activity. Left also accused the online trading “mob” of harassment and attempting to hack his Twitter account.
However, the mob also appears to be winning, with short-seller Melvin Capital reported to have closed out its short position on GameStop, which in turn may have also driven the ongoing rally.
Spreading to the UK?
As Wednesday dawned, it also seemed that the flurry of retail trading activity originating from r/wallstreetbets was spreading to some of the London market’s most heavily shorted stocks.
In late-morning trading, shares in Cineworld PLC (LON:CINE), Pearson PLC (LON:PSON) and J Sainsbury PLC (LON:SBRY), all of which have large short positions against them, were all seeing strong upticks in value, rising 9.7% to 80.2p, 9.4% to 832.6p and 3.3% to 259.7p respectively.
However, Markets.com’s Neil Wilson says these jumps may be less about the Reddit mob finding new targets to short sellers looking to close out their positions pre-emptively.
“It [the rally] is likely down to short covering as hedge funds back out of their positions in light of what has happened to heavily shorted stocks like GME. This is very much about managing risk. Given the situation across the pond vis-à-vis [Melvin Capital], I would think all hedge funds are taking a good hard look at all their short positions and deciding whether they are worth it”, Wilson said.
“Shorting can result in potentially infinite losses, so the risk management is always against you if the flows are there from buyers. As a result of the short covering, or rather in anticipation of it, some traders (maybe some on Reddit, who knows?) may be front-running and contributing to the pump”, he added.
--Updates share prices, adds Musk and analyst commentary--