A Resurgence in Meme Stock Mania
Keith Gill, widely recognized by his online name "Roaring Kitty," has reemerged, earlier this week posting on X (formerly Twitter) after 3 years from turning a 56,000 dollar profit into more than $30 million from investing in call options on Game Stop during the pandemic. On Sunday, Gill posted a meme on the social platform X, depicting a man leaning forward in his chair—a signal among gamers that things are getting serious. Gill and several bullish social media posts sent GameStop shares soaring by more than 74% at Monday's close, and another 60% after market close on Tuesday, marking the most substantial intraday trading jump since the meme stock craze of early 2021.
There were several stocks that were hit by this meme stock buying spree including but not unlimited to AMC and Koss doubling their stock price from the beginning of the week till Tuesday, as well as Blackberry saw a spike in their stock price. Since then the stocks have lost a lot of the momentum, however with it still being discussed in social media and from the events of 2021, anything is possible.
The Origins of the Meme Stock Phenomenon
The initial wave of the meme stock frenzy began in early 2021, during the height of the COVID-19 pandemic. GameStop, a struggling video game retailer on the verge of bankruptcy, was the focal point of this movement. As consumers shifted from physical game discs to digital downloads, GameStop's business model seemed increasingly obsolete. Wall Street hedge funds and major investors heavily shorted the stock, betting that its price would continue to plummet.
However, Keith Gill and a legion of retail investors on Reddit's WallStreetBets community saw potential where others saw despair. For one they had several cases that pointed out that the balance sheet and the future of gamestop did not reflect the stock price. Gill posted several Youtube videos making bullish cases that consumers were not going to move to downloadable games and that physical games and brick and mortar stores still have value. Most importantly, the short float, or the amount of stocks that are being shorted on Game Stop was around 140%. By buying massive amounts of GameStop shares, they triggered a short squeeze (Short Squeeze: Definition, Causes, and Examples (investopedia.com)), forcing those who bet against the stock to cover their positions by buying shares at higher prices. This pushed the stock from under $5 to nearly $400, causing substantial losses for hedge funds like Citron Research and Melvin Capital, which lost an estimated $5 billion.
The Aftermath and Lasting Impact
The meme stock saga of 2021 was a David vs. Goliath tale that saw individual investors triumph over institutional giants. GameStop's stock skyrocketed over 1,000%, while AMC Entertainment surged 2,300%. This movement disrupted traditional market dynamics and demonstrated the power of retail investors when united by a common goal and platform.
Ryan Cohen, co-founder of Chewy.com, emerged as a key figure during this period. He acquired a significant stake in GameStop, joined its board, and later became its CEO, with hopes of transforming the retailer into a more digital and e-commerce-oriented company. His involvement bolstered investor confidence, further fueling the stock's rise, keeping it out of bankruptcy, and hasn't seen the stock reach below $5 a share since.
The Latest Surge: Gill's Impact and Market Response
On Sunday night, Gill's tweet and video sparked renewed interest in meme stocks. GameStop shares tripled at one point, with trading volume skyrocketing to 28 times the average over the past year. AMC Entertainment also saw its shares surge by 135% over two days. However, this resurgence was short-lived. By mid-May, GameStop's shares had fallen by 19%, and AMC's by 20%. Gill's posts electrified social media platforms like Reddit, Discord, and StockTwits. His return was met with enthusiasm, reviving the spirit of the original 2021 mania. However, the dynamics of the market have changed since then.
Unlike the original meme stock surge, which was primarily driven by retail investors, the latest rally saw significant participation from sophisticated investors or High Frequency Hedge Funds (HFTs). These investors use algorithms and machine learning to trade on momentum, often front-running the buying and selling activities of individual investors. Data from Fidelity’s retail trading platform indicated that more users were placing sell orders than buy orders following Gill’s tweet, suggesting that many were cashing in on the gains rather than driving new purchases, or what users of Reddit would say “pump and dump,” activity (put a large amount of money in and then take it out quickly).
Moreover, many of the factors that fueled the 2021 craze—such as rock-bottom interest rates and surplus cash from stimulus checks—have dissipated. Credit card delinquencies are at decade highs, and the excess cash from the pandemic era has largely been spent. These changes have dampened the ability of retail investors to drive significant market moves.
Short Interest and Market Mechanics
One of the key drivers of the original meme stock surge was the extraordinarily high short-interest ratios. In 2021, over 140% of GameStop’s tradable shares were shorted, a situation
exacerbated by traders borrowing against already shorted stocks to place even larger bets against the company. This created a perfect storm for a short squeeze when the stock price began to climb.
Hedge funds and those shorting have been a lot more cautious to short a stock looking into its short float and free float, Game Stock and AMC all had short float over 20% which is standard to be subject to a short squeeze if there is a heavy buying their is very likely to be a fire sale in covering the shorts for the bearish investors. Nonetheless, it worked, Roaring Kitty once again saw the opportunity and with the support of his followers and other retail investors they performed another short squeeze. Short positions against GameStop’s shares stood at just over 24% and 27% for AMC, a significant drop from the peak of the 2021 craze. Although short sellers faced substantial paper losses during the recent surge, the overall pain was much less severe than in 2021.
Conclusion: The Legacy of Meme Stocks and Future Implications
AMC took advantage of its meme stock status by reducing its debt and bolstering its balance sheet through an at-the-market (ATM) offering, raising $125 million and swapping $164 million of debt for new shares. GameStop, however, did not have such offerings lined up, missing an opportunity to capitalize on the renewed interest in its stock.
The future of meme stocks remains uncertain. The sustainability of these stocks depends on maintaining the attention and enthusiasm of retail investors. While the novelty of the meme stock phenomenon may be fading, the power of social media and retail investor communities cannot be underestimated. The next meme stock surge will depend on its ability to capture the imagination of traders and maintain momentum.
Keith Gill’s recent return to the public eye has rekindled memories of the 2021 meme stock mania, reminding the market of the profound impact retail investors can have. The story of "Roaring Kitty" and the meme stock phenomenon highlights the evolving landscape of financial markets, where individual investors can challenge institutional funds and wealthy individuals and create unprecedented market movements. Although the conditions that sparked the original surge have changed, the potential for future meme stock moments persists. As long as there are platforms for collective action and investors willing to defy traditional market wisdom, the legacy of meme stocks will endure.
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