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AMC and GameStop made a return this week in an echo of the Reddit meme-stock frenzy earlier this year.
An analyst stated that short-squeeze candidates tend to trade more when their prices fall above their recent highs.
Four market experts explain the reasons for this week's volatility in meme-stocks.
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The GameStop and AMC share price spikes briefly this week, injecting some excitement into an otherwise dull market. Experts say there are explanations for the surprise return of meme stocks.
Both stocks were the darlings Reddit users. Trading volumes soared as both stocks saw an increase in trading volume. Their share prices shot up Tuesday by 37% to $225 at GameStop, and 26% to $47 at AMC.
Both companies are short-squeeze candidates and share prices in both companies see higher volumes of buys when they break above their recent trading highs. Market analyst Danielle Shay explained that when funds or traders short stocks, their stop-loss orders are usually set to kick in once the level has been crossed.
They know that they are wrong if the stock reaches recent highs. They have to buy to cover the position and cause volume buying to occur," Shay, director at Simpler Trading, told Insider.
Retail traders such as those on Reddit’s Wall Street Bets are attracted to stocks that have just hit a new high. Shay stated that the combination of short-covering with retail momentum leads to upward buying pressure.
GameStop has another factor. GameStop trades higher prior to earnings releases. The second quarter report for the online-game retailer is due September 8.
Another theory behind AMC's and GameStops's last week surge is that retail purchases were in place and ready to be made again. According to TrendSpider chief market analyst Jake Wujastyk both stocks rose because of the technical setup for a higher run,
Insider was told that there is a large volume shelf on both names. This created a base from which to price the 'launch'.
Prices might not be related to the underlying value
Brian Barnes, founder and CEO of M1 Finance, explained what had happened by quoting a Warren Buffett 2008 shareholder letter: "Price refers to what you pay." Value is what you get.
He said, "With things such as meme stocks, NFTs and even lumber we've seen price can be any in the short-term." "Short-term price fluctuations are caused by short-term supply, demand and volatility. This may not have anything to do with the underlying value.
These stocks have been driven by high demand and a stable supply. Barnes stated that "meme" excitement is part of a culture that encourages large groups to purchase stock to change the price, stick it to the man, or simply because it's fun.
GameStop shares rose by approximately $45 each on Tuesday. This stock had a short interest of approximately 7.5 million shares. Short sellers suffered a loss of $340 million Tuesday.
However, the aggregate losses were spread across a wide range of individuals. The US equity market is worth approximately $50 trillion, even though the losses were substantial. Barnes stated that this makes it a small, but entertaining, part of the overall market.
Fundamentals are only sentiment.
AMC and GameStop are the dominant stocks in the meme crowd. However, Reddit's most popular stocks this week were Clover Health and BlackBerry. The meme-stock market pump is similar to that of the crypto market where digital assets tend to move in the same direction driven by the same factor.
Derek Horstmeyer (finance professor at George Mason University’s School of Business) said that AMC and GME are resilient meme stocks. They have become more closely correlated since becoming meme stocks. This means that as one goes up, so does the other. These movements are based solely on sentiment, and not any fundamentals.
However, there are downside risks to investing in heavily shorted bets. Insider learned that meme stocks can be a risky investment. Robert Johnson, a professor of finance at Heider College of Business, said that many fortunes have been lost to speculation.
He said that he views meme stocks as a huge bubble that will burst at one point. Bubbles have existed for as long as financial market have been around.
