GameStop On Edge
GameStop GME is the poster child for last week’s wild stock market. Suddenly, manipulations were all the rage as novice investors ran amok.
However, don’t expect last week to repeat, much less establish a new money-for-the-masses trend. Manipulation works mainly on novice investors with money. Once they have taken the bait and lost their money (or, at least, the will to risk it further), the manipulation shops shut down until the next time.
But aren’t the rapidly rising stocks still in play?
No. Most of the manipulations were over and done last week, so the February stock market could take off in a radically different direction.
But isn’t GameStop special with all those short-selling hedge funds on the ropes?
Nope. Only hedge fund managers know what they are up to because they don’t report publicly. Those stories of hedge funds closing because of GameStop shorts? Fantasy. After all, the hedge fund “game” isn’t about who’s got the biggest social media following. It is about who’s savviest at investing in Wall Street markets. Hedge fund managers got where they are by knowing how to produce gains from myriad market temperaments, including how to handle tough situations.
That is why the Wednesday-Friday performance “flatline” of GameStop is so important. Something is going on besides brokerage firms getting antsy about their exuberant customers. Just check out the pattern of performance over those days…
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Notice one very important item. When GameStop hit a 1,000% gain on Thursday, the action shifted. Yes, the brokerage firm actions hurt, but the 75% drop that followed means much more was afoot. By the way, percentages are poor descriptors when they reverse. That 75% drop took GameStop’s overall gain down from the 1,000% to only 200% – the height of Monday’s rise.
Now, think about leverage. It always becomes popular when the smell of easy money is in the air. For investors, an easy way to leverage is through a margin account that (for most stocks) allows buying up to twice the cash in the account. While that means a 50% drop in the stock price wipes out the account value, the government rules are that there is a minimum “maintenance” margin requirement of 25%. Therefore, a 33.3+% stock price drop requires an investor to put up more cash or sell some shares. Moreover, most brokerage firms have 30% or higher minimum maintenance requirements, reducing further the drop that produces the dreaded “margin call” for more money.
So, with that math in our heads, what likely happened on Thursday, when GameStop fell a whopping 75%? Right – lots of forced GameStop share sells, cash deposits and/or sales of securities in a portfolio. In the end, imagine who might have bought those shares as they plummeted. It takes a lot of courage to step into a plummeting stock, especially when the plummet keeps setting off “time out” circuit breakers.
That is, it takes courage to buy a plummeting stock unless the buyer is a hedge fund covering its short sales
Now what? That short-covering opportunity means the loss of the leading argument for GameStock’s never-ending rise – namely, recalcitrant hedge funds roasting on the short-sale spit, unwilling to cover and take their hit. Thursday allowed the hedge funds out at good (low) prices – if they wanted to.
Therefore, the next GameStop moves are up to those millionaire and millionaire wanna-be shareholders. The age-old question they need to address now is who is going to buy their shares at higher prices?
If the answer is, “I dunno,” then reality, here we come – and that’s a long way down from here. The long-term monthly stock chart gives an idea of just how low “long way down” is.
The bottom line: Don’t hold a rapidly rising stock because it is rapidly rising and “everyone” says it’s going to rapidly rise some more
Don’t be fodder for the wolves of Wall Street. This is the time to get out of any stock you bought simply because it is (was) going up and was being talked about. Those stocks could be traps. Last week, they appeared everywhere, and they are wealth killers.
(See more explanation in “The Five Forces That Doom GameStop-Type Strategies”)