GameStop shares surged again in pre-market trading Monday, another sign that “frenetic trading by individual investors is leading to outsize stock-market moves,” WSJ reports.
The Big Picture: More than two million shares changed hands in pre-market trading, resulting in a 54% price spike. On Friday, GameStop’s trading had briefly been halted due to volatility when the stock more than tripled.
So Why’s This Happening: “The rally has been fueled by individual investors, encouraging each other on social media to pile into GameStop shares and options. The buying pressure has led money managers to switch out of substantial bets that the stock would fall, analysts said. This resulted in a short squeeze, in which rising prices prompt investors to buy back shares they had sold short to cut their losses, pushing the stock higher still.”
GameStop has a market value of roughly $5 billion and has posted four years of declining sales. Needless, to say the latest trend “exemplifies the increased sway of retail investors. Many poured into the market during the coronavirus lockdown, congregating on online platforms to swap trading ideas and to boast about winning bets.”
The Takeaway: Moves like this are throwing stock prices out of whack with fundamentals, according to some fund managers.
GameStop ($GME) is another victim of a small float stock gaining viral popularity with retail speculators in gambling communities such as Wall Street Bets (/r/WSB).
We are long-term minded investors that buy or sell based on macro, fundamental, or valuation reasons, so we will of course stay away from stocks like these. But as fans of the stock market, we will also enjoy watching the drama unfold from the sidelines.