This is a new dynamic. We’ve referenced GameStop (see here and here) and other stocks with high short interest being targets of message board traders before, but we haven’t seen coordinated action with this kind of an impact before.
Instead of investing based on company fundamentals, traders in GameStop are trying to squeeze short investors. A short squeeze is when an investor who shorts a stock is forced to buy it back because the price has risen so much. In pre-market trading early this morning GameStop shares traded as high as $365. Ten days ago the stock was selling for $20. Short squeezes most often happen when there isn’t sufficient equity in a shorts’ portfolio to cover unrealized losses on a position.
When professional investors collude to manipulate a stock price, the SEC comes knocking. What happens when some “retards” (how the traders refer to themselves) on r/WallStreetBets collude and go “YOLO” on “stonks” to drive up their prices and squeeze the shorts? We are probably going to find out.
There’s no doubt the SEC is paying attention here and we only hope Jay Powell isn’t burying his head in the sand on this. Free money and repeatedly bailing out speculators in times of turmoil, which is the Fed’s new MO, has been a great enabler of the type of mania we are seeing today.
While it may be tempting to get in the game when you see prices going up 60%, 70%, or 100% in a day, steer clear. This is 100% speculation and has absolutely nothing to do with investing. Other stocks that are or may be targeted by the bull raiders are listed below, courtesy of Barron’s.
