US meme stocks GameStop Corp (NYSE:GME) and AMC Entertainment Holdings (NYSE:AMC) have attracted a surge of interest on both sides of the Atlantic while hitting short-sellers hard in the pocket.
Short sellers of the stock are set to lose $1.2 billion today, according to data from Ortex, with the stock surge today adding up to around $2.5 billion of losses for short-sellers so far this month, with other sources saying the two-day loss figure is nearer $5 billion.
The US games retailer was the second most bought stock on the UK investment platform Interactive Investor (ii) yesterday, while other online platforms, Freetrade and Saxo, said they had seen a tenfold increase in GameStop trading.
Freetrade said orders for AMC Entertainment, another big meme stock from the original craze in 2021, increased a whopping 43 times on Monday compared to Friday.
Shares in GameStop, the small cap video games, rose 70% on Monday and opening 70% higher to $51.91 after roughly an hour's trading on Tuesday.
Other 2021 favourites were also rising, AMC surging 87% and Blackberry (TSX:BB) ringing in with a 17% premarket gain.
Traders on the look-out for short-term gains
Mike Owens, senior sales trader at Saxo UK, says: “With modern online investment tools, traders will always be on the lookout for price momentum and to take advantage of short-term market moves."
Owens said the "social media, retail trading community" tend to like the sort of derivative products such as options and CFDs on stocks like GameStop.
"Buying call options on these companies allows traders to define the cost of their trade while also potentially generating large gains in the event of a sharp upward price move," he explains.
Alex Campbell, head of communications at Freetrade, said orders today are pacing to surpass Monday trading volumes.
"The meme stocks are back and rallying for no good fundamental reason," Campbell said, noting that AMC has capitalized on this excess quickly by raising $250 million from a share offering and he said GME's management might do the same.
"That’s good corporate finance for meme stocks, right? Certainly it’s a way to raise cheap non-dilutive capital."
The situation today is far from the same as the first meme stock craze in 2021, said Nicolas Colas of DataTrek Research.
"Retail traders are not just sitting at home with little to do aside from trade stocks. The Federal government has not just air dropped trillions of stimulus money," Colas said in a note to clients.
"Yes, we’re sure that we will hear more about meme stocks in the weeks to come, but not with the same fervor as three years ago."
Roulette wheel trading
Myron Jobson, senior personal finance analyst at ii, pointed to the surprise return of a social media account associated with the original meme stock craze, Redditor and YouTuber Roaring Kitty, breathed new life into the stocks, which had broadly been following a downward trend in the past three years.
"The surge has nothing to do with a turnaround in the company’s fortunes and everything to do with the renaissance of the FOMO (fear of missing out) sentiment that saw the stock price of the video game retailer inexplicably spike, despite the company’s fundamentals painting a bleak picture," said Jobson.
He says Mark Twain’s famous maxim that 'history doesn't repeat itself but it often rhymes,’ is worth remembering.
"Time will tell whether the latest uptick in GameStop’s stock price becomes the latest in a string of flash-in-the-pan moments the firm has experienced over the years," Jobson said.
"One of the key takeaways from the meme stock saga is the importance of understanding investment risk. Risk is an inherent part of investing, but there are some investments that raise the stakes to levels akin to slot machines in a casino.
"Treating investing like a spin at a roulette wheel by betting on highly speculative stocks is not a sustainable strategy to build wealth over the long term. The reality is that the odds are heavily stacked against those who attempt to time the market."
"Some investors can afford to speculate on the stock, knowing full well that there is a substantial risk of losing money. But betting it all in hope of substantial gains is not a wise investment strategy."
Freetrade's Campbell agreed.
"Retail investors should proceed with caution. Whatever goes up (and up and up … ) is bound to fall back down," he said.
"After the highs of 2021, thousands of investors bought these stocks at hundreds of dollars per share. Even a 200% increase this week has barely made a dent in those substantial losses.
"If you’re minded to take a punt - and yes, this is no more than a punt! - then only put in money that you’re happy to goodbye to."