Shares of GameStop NYSE:GME roared back to life this week following the online reappearance of Keith Gill, known as “Roaring Kitty”. This was the man at the heart of the meme craze during the COVID-19 pandemic that saw an unprecedented battle between retail traders and hedge funds.
GameStop soared more than 2,000% in early 2021 as retail traders banded together, severely punishing hedge funds who were shorting the stock. However, prices crashed down within weeks as the excitement fizzled with the lack of positive fundamentals fuelling downside pressures.
“This highlights the major risks around meme stocks – that may surge aggressively due to growing popularity but are likely to crash as fast if sentiment turns,” said Lukman Otunuga, an analyst with FX brokerage FXTM. “The aggressively bullish price action from GameStop this week creates a sense of déjà vu, especially when considering how things ultimately played out.”
Short sellers, whether individual investors or hedge funds, anticipate that the price of a particular stock will decrease. They borrow shares of this stock, sell them at the current price, and then repurchase them after the price drops, profiting from the difference. However, this strategy carries significant risks. If the stock price does not decline as expected, short sellers can incur losses, as was the case with GameStop.
Following Roaring Kitty’s surprise comeback on Monday, GameStop rose around 75%; but short sellers lost $1 billion due to GameStop’s sudden price jump. Elsewhere other meme-related stocks were buoyed. Theatre chain operator AMC NYSE:AMC gained as much as 50% during the session, while Trump Media & Technology [NASDAQ:DJT] made 8%. GameStop stock hit $64 on Tuesday, but has since dropped to $39 at time of writing.
“At Saxo, we have seen a x10 increase in client activity in Gamestop due to the latest ‘meme’ interest over the weekend,” said Mike Owens, a senior sales trader at Saxo. “What is particularly appealing to Saxo clients is that not only do we provide trading in a vast array of global company shares, like Gamestop, but that we also offer derivative products such as stock options and CFDs on the specific companies which the ‘social media, retail trading community’ tend to follow. 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.”
How long will meme stock madness last?
It is likely this frenzy is going to run all summer, with the likes of influencer Andrew Tate, among others, involved. Their power is immense and it’s going to be a rollercoaster. It’s a revival of the trend of 2021 and 2022. Back then, many individual investors – often young and inexperienced – got badly burned by the experience. Without doubt, investors will get burned by this frenzy too.
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Analysts, wealth managers and yes, even hedge funds, are urging everyone to exercise maximum caution with meme stock trading that’s being fuelled by social media.
The original meme stock rally of 2021, also driven by Keith Gill, was fuelled by a surge of new retail traders entering the market, many of whom had additional liquidity from pandemic stimulus measures and historically low interest rates. Back then Gill, aka Roaring Kitty, shared undervalued GameStop stock on his X page. He bought it for $53,000 in 2019, and eventually, reportedly, turned it into $48 million during the GameStop hype he led.
“Again, we expect day traders will pile in not because they think the memes have any real value, but because they hope others will get FOMO (the Fear of Missing Out), jack the price up, and then they can sell off and make a quick profit,” said Nigel Green, CEO of wealth manager deVere. “Gambling is not the same as investing, and for me this is gambling. Understand the real risks involved to your money.”
