A Short-Squeeze Of Epic Proportions In GameStop
I am sure by now that most people with an interest in the stock market or even just the news have heard a little about GameStop (NYSE:GME). The stock is more than 1,600% in about two weeks and there is really no telling where it may go from here. No, I am not here to tell you it’s time to buy this stock. Nor am I here to tell you to short it. I am here to tell you that anyone who puts money on this stock now, in whatever form, is a fool on a fool’s errand to find a greater fool to close out the position.
"The price action is completely divorced from fundamentals. It's a relatively small universe of retail investors that are pushing around a relatively small universe of stocks so at the end of the day, this Reddit army, they don't have the wherewithal to sustain these big losses," said Jason Katz, a managing director and portfolio manager at UBS. "It's not going to be the institutions left holding the bag. It's the kids on my basketball team asking me about how options work."
What Exactly Is Going On With Gamestop?
GameStop is a business with dubious fundamentals. It is a seller and reseller of video gaming equipment, accessories, and collectibles with an erratic history of sales and profits. One quarter the company is booming and the next it’s not and the pandemic, for some reason, didn’t spur sales like some analysts thought it would. Sales of new units and games are off the hook, after all, it makes sense to think that reused equipment is in high-demand too. But then you think about social media and all the back channel and insider-ways to get that used equipment and it starts to make sense that bears are hovering over this business. It is fundamentally flawed.
So, the short-interest on GameStop was in the high-triple-digits going into this thing and is still hovering near 150%. As in, there is 1.5X times the number of GameStop shares sold short than there are in the actual float. That’s a lot of short-interest and fuel for a short-covering rally if we ever saw it. So in steps social media platforms like Reddit and the group WallStreetBets. They, and others like them, spotted the high short interest and began to spread the word; this stock is over-shorted and ripe for a squeeze.
Like a snowball the movement to squeeze out the shorts in GameStop grew, and grew, and grew until one day, the stock broke out of a range and started skyrocketing. Why? Because the shorts got scared and there were a lot of them and a lot of shares that needed to be bought back. So the bears got squeezed, at last some of them, because like I said, the short-interest is still very high and there are already signs a top is forming, and the underlying fundamentals remain the same. The bottom line is that this story is not over, not by a long-shot, and considering there are other very heavily shorted industries out there today, we are going to see another squeeze just like it.
The Technical Outlook: GameStop Volatility Is On The Rise
GameStop’s price action was so abrupt and sharp that the hourly charts are the only way to really view it. The chart shows a market quietly humming along near the $17 level and then wham! The bulls started buying it up. Soon after the stock was up over 100% and then 100% again and again until now where it has begun to face some resistance. Resistance is in the form of profit-takers, a still high and now much-better-positioned short-interest, and now bearish options as well. The open interest on puts is through the roof.
The candles are showing increased volatility at these new levels near $320 and I don’t think it will stop. What we have now is a battle between the crowd-sourced bulls and the big-money bears and in the end, it won’t by the little guy that wins.
Companies Mentioned in This Article
Compare These Stocks
Add These Stocks to My Watchlist
7 Low-Priced Dividend Stocks Under $10
The recent trading activity surrounding low-priced stocks like GameStop (NYSE:GME) is a reminder to investors of the high-risk nature involved with these stocks. Often when a stock trades for under $10 (also termed a penny stock), it is trading that low for a reason. The company may not be profitable, or in the case of GameStop, it finds itself with a business model that no longer fits with consumer trends.
But that’s not always the case. It is possible to find low-priced stocks, even penny stocks, that offer great value. This is particularly true if the stock offers investors a dividend. Dividend-earning stocks are a diversification source for a consumer’s portfolio, particularly if the dividend gets reinvested. It’s literally like paying yourself for owning the stock.
And the stocks in this presentation look ready also to deliver some additional stock price growth that can increase your total return.
View the "7 Low-Priced Dividend Stocks Under $10".