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Smaller investors face down hedge funds, as GameStop soars

Monday, January 25, 2021 | The Associated Press


A woman wears a face mask as she walks past a GameStop store in Des Plaines, Ill., Thursday, Oct. 15, 2020. The latest battleground between the proletariat and the hedge funds serving the 1% isn’t on just any street. It’s on Wall Street. At least, that’s the view within an army of smaller-pocketed, optimistic investors who are throwing dollars and buy orders at the stock of video-game retailer GameStop. (AP Photo/Nam Y. Huh, file)

NEW YORK (AP) — A head-scratching David and Goliath story is playing out on Wall Street over the stock price of a money-losing video game retailer.

An army of smaller-pocketed, optimistic investors is throwing dollars and buy orders at the stock of GameStop — in direct opposition to a group of wealthy investors who are counting on the stock price to plunge.

The resulting action is wild, with GameStop's stock soaring nearly 145% in less than two hours Monday morning, only for the gains to disappear quickly afterward.

The struggling company based in Grapevine, Texas, has lost $1.6 billion over the last 12 quarters, and its stock fell for six straight years before rebounding in 2020. So, it might seem like a strange place for the locus of so much movement. But GameStop has been a target of many professional investors, who say the company will continue to founder as sales of games continue to go online.

These investors have been betting that GameStop's stock will fall. They “shorted” the stock, which means they borrowed shares and sold them, hoping to buy them back at a cheaper price and pocket the difference. But such bets have been disastrous recently.

GameStop was trading at less than $18 a few weeks ago. Its stock shot higher after the company named three new directors to its board on Jan. 11 to help speed its turnaround, including a co-founder of online pet-supply retailer Chewy. The thought was that should help GameStop's digital transformation.

A cavalcade of smaller investors, meanwhile, has been exhorting each other on the internet to keep the stock's momentum flying toward the moon. Many are pitching it as a battle of regular people versus hedge funds and big Wall Street firms.

It took just five days for GameStop's stock to double after announcing its board shakeup. This past Friday, it surged 51%, a larger gain than big stocks like Apple or Exxon Mobil have ever had in a day. For GameStop, the 51% move was only its second-best day of the month — and the month isn't over.

The meteoric rise pushed some short sellers to get out of their bets, done by buying shares of the stock, and that helped accelerate its momentum even further. On Monday, the push and pull was so extreme that trading in GameStop's stock was temporarily halted at least nine times for volatility.

It closed Monday at $76.79, after swinging between $65.01 and $159.18 earlier in the day.

“This is quite the experience for my first month in the stock market. Holding till infinity,” posted one user on a Reddit discussion about GameStop stock. A moment later, another user said, “We’re literally more powerful than the big firms right now.”

That same sentiment carried well beyond internet message boards to Wall Street itself.

“As someone who started trading stocks in the late 90s in college, I would always remember watching when the small retail trading groups would get crushed by hedge funds and savvy short-sellers,” Edward Moya, senior market analyst at OANDA, said in a report. “What happened with GameStop’s stock is a reminder of how times are changing.”


7 Stocks That Could Provide a Year-End Rally

It’s rough in the markets right now. Underlying the volatility is uncertainty. The VIX Index (INDEXCBOE: VIX) otherwise known as the Fear Index is unofficial, but an eerily accurate predictor of market sentiment. And the VIX is up 30% in the last month.

Is this uncertainty due to concerns over additional lockdown measures? Is it about the lack of additional coronavirus stimulus? Is the market reacting to a surge in jobless claims? Or is this just the somewhat normal volatility that comes in an election year that promises to be like none in American history.

The answer is all of the above and then some. But does that mean you should stay out of equities? I don’t think so. Where are you going to go? The Fed has promised interest rates are going nowhere fast. And that bit of news is weighing down the bond market.

So stocks it is. But although growth-seeking investors may be tempted to look at the tech sector to see what’s on sale today, I suggest taking a more targeted approach. Rather than looking at a single sector, try to look at solid performers in different sectors that may be ready to surge over the last three months.

The pandemic brought the entire market down. But once investors took a breath they found bargains. And if you had the courage to put your money to work in those stocks, you’ve been rewarded.

Times like these call for the same type of courage. And that’s why we’ve put together this special presentation with seven stocks that look ready to surprise investors with nice end-of-year gains.

View the "7 Stocks That Could Provide a Year-End Rally".

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