Why has Gamestop (NASDAQ: GME) gone up? An Explanation

You may have seen this story overnight. A stock called Gamestop (NASDAQ: GME) listed in the US was up 92% yesterday to $147 and is up to $236 in after-hours trade. They are calling it "Won't Stop" on the online forums. This is the explanation from one of the Newswires in the US – “A squeeze in a number of heavily shorted stocks, attributed to retail investors coordinating online forums like wallstreetbets on Reddit, has largely continued today. Some of the notable gainers as of late have included GameStop, Bed Bath & Beyond, BlackBerry, AMC Entertainment, SunPower and National Beverage. The outsized rallies, which have been fuelled by record bullish bets in the options market, have pushed 50 most-shorted stocks on Russell 3000 to 33% gain MTD, on pace for best month since at least 2008. Record short squeeze continues to receive lot of attention in the press at a time when a number of other market developments have also raised concerns about bubble-like conditions. However, most of the factors cited have been around for a while. These include government stimulus checks, more time at home due to the pandemic, free trading on online brokerage platforms, the heightened influence of narrative-driven investing, a fear of missing out (FOMO), and the broader central bank liquidity tailwind.”

It raises a few concepts:

1. One we already know - That the pandemic has created a swathe of traders stuck at home using stimulus money to speculate in the stock market for short term gains.
2. Another we already know – that the most shorted stocks can move fast, reverse quickly, are more volatile. A good hunting ground for traders in the short term. You can make a lot of money fast if you catch/create the turning point.
3. A newer one - That smaller retail investors are beginning to successfully co-ordinate in online forums and manipulate share prices. In the US online share market groups like "Wallstreetbets" and "Stocktwits" (see HENRYS TAKE) boast nearly 500,000 more tech-savvy members, hell-bent on pumping stocks and "gamifying" the market.

Perhaps we should start a newsletter called “Record Short Squeeze” that does nothing but focus on small, shorted, stocks identifying their turning points.

You can find the list of most shorted stocks in many places:

One is on the Market Index website. Most shorted stocks at the moment include. If you are wondering what shorting is and how it works, we have previously covered the anatomy of shorting. But shorting is not the point. In Australia, the liquidity is so poor and the institutions so absent from the small end of the market that it is less about shorted stocks and more about finding a stock with a small share price and half an idea, buying millions of shares and spending the next few days, weeks, months, your lifetime, telling everyone about it at every opportunity, these days using social media and stock market websites and investment platforms. It is the short term embodiment of one of the oldest principles of funds management – its called “Buy it then tell everyone else to buy it”. This is particularly true in the small/mid-cap end of the market. Any fund manager running more than a few million simply cannot put money in and take it out (cannot trade) smaller stocks without pumping or smashing the share price. So they have to, if they are going to play in that space, be long-term investors – because they can’t trade illiquid stocks. In which case the game plan is to do their research quietly, identify smaller companies that have a long term growth profile, build a meaningful stake gently (without letting anyone else know you’re doing it – leaky brokers being the problem), and when set, go and tell the world what a great company it is and get the share price moving. You might think fund managers, especially the high profile fund managers, are doing you a favour by generously giving you their secret stock tips in their presentations, weekly videos, monthly reports and on websites that talk about stocks. But what you might not realise is that they are gagging to tell you, it is not a favour, it is not a secret, it is not high brow, it is base spruiking - having got set they want the world to buy the stocks they've bought and so are busting to tell you. In small and mid-cap stocks, for a high profile fund manager, it is almost self-fulfilling. And the fact that their audience hangs on their words like they were delivering pearls of secret wisdom just makes it great to be a successful fund manager.   In this current 2020 game of “influencing” successful "investment" is not an intellectual pursuit involving high-brow fundamental analysis and the grinding out of compounding returns in the long term, it is about a pandemic inspired/funded herd trying to manipulate ten of thousands of other retail investors to buy a stock they just bought. It is a game of pass the hot potato, of speed, influence and timing, and the fundamentals and the long term don't matter. It’s gone on for years, of course, spruiking (talking your own book) and price manipulation. Since the first stock traded on the first stock market, there have been people telling stories with an agenda. You know it, it's obvious, It comes and goes, and it is booming at the moment. It’ll wane, as the stimulus cheques end, as stock after stock pops then drops, as the late-comer losses create cynicism and push back. It’s a “moment” that's happening now. I would love to play and am the last person to finger-wag or begrudge anyone else making money in the stock, it's what we’re here for. I just wish I could apply science, because, without that, there is no value for me to add. So I'll watch, and wave (not wag). All power to you if you end up on the right side of it. And for the long term fundamental investors - nothing's changed, nothing to see here - "Carry on".

FUNDAMENTAL OBSERVATIONS

Gamestop numbers - turning over US$ 8.29bn and forecast to make a loss until 2023. Stay up to date with the market trends with a 14 day free trial. No credit card required, sign up here