Articles | February 2, 2021
Recent heavy volatility has been driven by a tug-of-war between the stock market’s so-called Davids and Goliaths.
Market turbulence in late January started with huge spikes for a few stocks, including GameStop and movie theater chain AMC. These stock surges were driven by individual investors, many of whom gather online, in forums such as Reddit and Facebook. These small investors chatted about these stocks on these sites, plowed money into the shares and pushed up the stock prices in an effort to both make money for themselves and hamstring the efforts of hedge funds that were “shorting” shares of these firms.
Funds that “short” stocks borrow shares that they think will decline, sell those shares and then (ideally) pocket the difference when they buy them back at a lower price. Short sellers often target stocks with deteriorating business fundamentals — GameStop’s revenue declined sharply in Q3, and AMC’s business has struggled with moviegoing being hit hard by the pandemic.
If short sellers get these bets wrong, and the stocks actually appreciate in value, it creates what is known as a “short squeeze.” In a short squeeze, short sellers are forced to cover their positions by buying more shares, which in turn pushes up the stock price even further. The small investors who ganged up in GameStop shares aimed, successfully, to create a “short squeeze” for big Wall Street investors.
The gains that were generated in this recent rally were eye-popping: Gamestop shares surged around 1700 percent for the month through January 27, and movie theater chain AMC saw its shares jump 300 percent in a day on Wednesday. However, the exuberant rise of these stocks at the hands of small investors has been short-lived. Trading platforms such as Robinhood, Schwab and TD Ameritrade all cut trading in GameStop, and the stock fell more than 40 percent on January 28.
There are several messages we can glean from the short-term volatility in a small number of stocks in recent weeks.
In the words of the late great Gilda Radner’s SNL character Roseanne Roseannadanna: “It just goes to show you, it’s always something – if it’s not one thing, it’s another.”
The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. On all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.
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