GameStop shares didn’t have much game on Tuesday, as the stock at the center of a recent market trading frenzy lost more than half of its value.
Silver prices also retreated as the frenetic social media-driven trading that has stunned global financial markets appeared to fizzle, at least for now.
The video game retailer’s shares, which have seesawed wildly with hedge funds and other investors making or losing billions of dollars, closed down by $135, or 60 percent, to $90. They had hit a high of $483 last week.
Other so-called meme stocks caught up in the Reddit rally also sold off. AMC Entertainment Holdings Inc, the movie-theater operator that is majority-owned by Dalian Wanda Group in Beijing, closed down $5.48, or 41 percent, to $7.82.
“The rally is likely over (since) the short positions are pretty well taken care of,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “That’s the game you play when you do this thing. It can work for a while until it stops working, and when it stops working, it reverses pretty quickly.”
“Short selling” is a stock market practice in which someone borrows a stock from a holder and then sells it with the expectation that the stock’s price will fall.
For example, if the short-seller borrows the shares at $50, sells them at that price and later buys them back at $20 to return to the lender, the profit is $30 a share.
However, a “short squeeze” occurs if the stock does not fall, or even rises, and the borrower is forced to buy the shares back. The activity in which the “shorts” scramble to buy the shares back is called “short-covering”.
In the case of GameStop and the other stocks, it appeared the price run-up, largely generated by the WallStreetBets online forum on Reddit, was to antagonize Wall Street hedge funds that were short the shares.
Now, longtime members of the forum are questioning the motives of new users who have recently appeared.
WallStreetBets has been inundated by bots that question some of the members’ investing initiatives and promote commission-free brokerage accounts, according to an analysis of the posts by The Wall Street Journal.
Messages supporting stocks that don’t have large short positions are criticized by members as being controlled by big money interests to dilute the GameStop play.
“Seriously, the 6 million new users have —— this place up,” one user wrote Monday.
“New users are coming here to screw us,” a post on Jan 27 read.
Short-sellers saw paper gains of $3.39 billion during Tuesday’s session, according to S3 Partners. Year-to-date realized and unrealized losses for shorts, however, recently stood at $9.2 billion.
“We have had a lot of shorts take their losses and walk away from the trade,” said Ihor Dusaniwsky, managing director of predictive analytics at S3.
Spot silver prices, an alternative focus in the battle between a group of small traders and the hedge funds, fell more than 7 percent Tuesday after hitting an eight-year high on Monday. The iShares Silver Trust, the main silver exchange-traded fund (ETF), was down 8.4 percent.
Also slowing down silver was a Chicago Mercantile Exchange margin increase on contracts for the metal, which makes speculative trades more expensive. The retail action in silver has sent some dealers scrambling for bars and coins to meet demand.
Analysts said the silver pullback may show the limits of small investors’ impact in a large market.
In London, a sign of still-strong demand came from online greeting-card retailer Moonpig, whose shares leapt 17 percent in their debut, while emerging markets research house Tellimer named Ping An Insurance and Tencent, both major Chinese companies, as ripe for a short-squeeze in Asia.
Online broker Robinhood, on whose platform much of the speculative action has unfolded, raised trading limits on GameStop Corp, AMC and other stocks on Tuesday.
Analysts predict that the market action, which has drawn the attention of regulators and politicians was likely to fade and was just a matter of how soon.
“This is a pretty narrow strategy that likely creates some bizarre situations like GameStop and AMC, but it’s not broad enough to change how institutional investors are going to invest,” said Rick Meckler, a partner at Cherry Lane Investments, an investment office in New Jersey.
“The strength of the move was so severe that it really opened up people’s eyes to the power of social media in the investment world,” he said. “But having seen it and how short term the nature of it is, I think it’ll lose its surprise. Can already see it with silver.”
Some observers also are wondering whether the stock market is approaching bubble territory. US stocks have roared higher by roughly 70 percent since March.
“You might say a bubble occurs when people think that the market is going to go up but worry that it may drop,” said Robert Shiller, a Yale University professor who has won a Nobel prize for his work on explaining stock price movements. “That is where we are.”
Schiller, however, said that some hallmarks of a classic bubble aren’t present, such as investors talking about a “new era” for the economy.
In interviews with more than a dozen digital brokerage users, Reuters found a younger generation approaches trading much differently than Wall Street does. So retail traders and professionals may be tempted to make squeezing short positions a main investment strategy.
“Redditors are focused on meme stocks and that fight should continue — right now they think that silver is a distraction to their cause,” said Ephraim Rinsky, a novelist who was one of the first Redditors to post about buying silver on WallStreetBets.
There also is still a lot of cash floating around the market, which will continue to fuel stock speculation.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Federal Reserve has pretty much signaled to Wall Street that it won’t allow for a big stock market downturn.
“As long as interest rates are this low, it’s really hard for me to see how you could have much of a correction in stocks,” she said.
Agencies contributed to this story.
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