History in the Making

GameStop and the “Short Squeeze Stampede”

No other stock has had media attention recently like GameStop. In fact, Mad Money Cramer himself basically dedicated most of his coverage today to the stock.

GameStop is currently trading after-hours on 1/25 at $88.87. It opened today around $97 and surged to about $145 before the Nasdaq froze trading for the 2nd time in two days. GameStop is in the midst of a dramatic “short squeeze” that can only make sense in this wild covid stock market.

As the term “short squeeze” has been thrown around over the weekend, I believe most amateur investors might not truly know what it means. To understand a short squeeze…first you have to understand a short. Similar to buying stock, investors (often institutions) can sell a stock…even if they don’t own it. Shorting a stock would be hoping that the price falls because I owe someone the stock. If I short a stock at $18 and the stock falls to $15, I can buy that stock to fulfill the obligation and make $3 on the position.

So that is shorting a stock…so now to explain GameStop. Gamestop has had a nice bullish run for most of 2021. At the same time, some investors (especially institutions) have taken positions of bearish sentiment. Millions of short positions had been opened in this same time. Actually, so many short positions were opened, that GME hit an astoundingly noticeable amount of short interest above 130%.

What happened to GME essentially became an issue of supply and demand…with a catalyst of a subreddit community. You had all of these people that owed the stock on paper. “Retail investors” began pushing up GME with option calls and physical shares. As the demand increased, the supply decreased…and people starting getting called out on the shorts they sold. The price continued to skyrocket Friday as those shorts had to be purchased back. In the end, a number of Reddit users walked away millionaires, and some hedge funds like Melvin Capital lost billions.

The war between an army of Robinhood investors and Wall Street hedge funds continued Monday. GameStop is still stuck in a short squeeze and the daily average trading volume was triple what GameStop had normally seen on average. As of now, it seems the squeeze is going to continue, as GME is up over 12% after-hours. I am sure there are varying opinions on this, but you also have to realize the amount of short interest on the company was unprecedented.

As I hear people talk about this, the first thing most say is that GameStop has no future. I don’t know a single person that would argue any kind of bullish vision for the company. That being said, this surge in price over the last couple of days is a complete technical move. It has nothing to do with the underlying financials or news of the company. I am not a financial advisor, but I would warn against a long term investment in GME.

The interesting thing about this specific incident is the semi-coordinated effort of a movement of amateur investors. Originating in the subreddit Wallstreetbets, the GME bullish movement moved through chatrooms across the internet. Of course, short squeezes have happened before on the market. The difference here is that this was a dynamic movement orchestrated by thousands of amateur investors that saw an opportunity. These people overcame major hedge funds that were overexposed on shorts with GameStop. The result is historical…and will certainly be talked about for years to come.