‘Reddit Rally’ Stocks Bounce a Day After Sharp Selloff

GameStop
FILE PHOTO: GameStop logo is seen in this illustration taken February 2, 2021. REUTERS/Dado Ruvic/Illustration

GameStop and other social media darlings rebounded in calmer trading on Wednesday from their sharp sell-off in the prior session as investors turned their focus to the possibility of tighter U.S. trading regulations.

Mass buying over the past two weeks by amateur traders following posts on social media fueled a fierce rally in companies that big hedge funds had bet against, including videogame retailer GameStop and cinema operator AMC Entertainment.

GameStop had soared as high as $483 last week, fueled by posts on the popular Reddit forum WallStreetBets, then dived and on Tuesday fell briefly below $90.

On Wednesday GameStop shares closed up 2.68% at around $92.41. They seesawed all day but within a range, while shares of AMC rose 14.71% a day after dropping 41%.

Some professional investors bemoaned the volatility and warned that retail investors who piled in could ultimately face big losses.

“The fundamentals are well known and obviously the stock prices have detached from the fundamentals,” said Stephen Massocca, senior vice president at Wedbush Securities. “I have told people just stay away, it is dynamite and who knows when, how or where it blows up.”

But many Reddit users on WallStreetBets exhorted one another to stay in the stocks despite the big swings.

“Hold and buy more” AMC shares, wrote Reddit user Avocadochicken93, “TO THE MOON AND BEYOND!”

Silver prices advanced modestly after surging on Monday to eight-year high after the metal became an alternate focus for retail traders. Analysts expected more volatility, even after Reddit posts urged traders to avoid silver.

The head of the U.S. Securities and Exchange Commission, which regulates markets, will meet with Treasury Secretary Janet Yellen and the heads of the Federal Reserve and the Commodity Futures Trading Commission as soon as Thursday, a Treasury official told Reuters. The SEC is reviewing social media posts for signs of potential fraud, Bloomberg News reported, citing unnamed sources. [L4N2K94J4]

Yellen has asked to discuss recent volatility and whether trade has been consistent with fair and efficient markets.

Her meeting will probably include “some disguised reference to GameStop somewhere on the fringes, but it probably won’t be called out specifically,” said Robert Pavlik, chief investment strategist at SlateStone Wealth LLC in New York.

Experts expect focus to fall on the ever-larger role played by hedge funds and other non-bank firms in financial markets, while small traders are bracing for a showdown.

Online brokerage app Robinhood will allow investors to buy parts of shares in GameStop and AMC, a move that could encourage participation by smaller investors.

St. Louis Fed president James Bullard said frenzied trading in GameStop is not the result of the Fed’s loose monetary policy and is not an issue for the central bank.

EXPOSED INVESTORS

Regulators have not yet signaled what form any official actions could take. Potential targets range from retail brokers’ capital requirements to questioning the fee-free brokerage model that has encouraged much of the trade.

This issue is global. European regulators are monitoring the risk that a surge in retail investors and online brokers could create bubbles inflated by social media, France’s AMF markets watchdog said.

The benchmark S&P 500 closed slightly higher as U.S. earnings season neared the finish line and THE CBOE volatility index eased for the third straight sessions. [.N] Analysts said the Reddit-driven action appeared to be contained.

“There isn’t much of a worry that this is a signal that could destabilize the whole system,” said Simona Gambarini, markets economist at Capital Economics.

Other so-called “meme stocks” caught up in the Reddit rally rose on Wednesday, with headphone maker Koss Corp and home furnishing retailer Bed Bath & Beyond rising 27.95% and 10.40%, respectively. BlackBerry Ltd’s U.S.-listed shares were up 3.9%, following a 21% slide a day earlier.

GameStop, AMC, BlackBerry and Koss did not respond to Reuters requests for comment. Bed Bath & Beyond declined to comment.

GameStop named three new executives Wednesday, including its first chief technology officer, to further push into e-commerce. In mid-January, right before the recent frenzy began, it named Chewy.com founder Ryan Cohen and two other e-commerce veterans to its board.

The number of shorted GameStop shares edged higher, according to the latest data from analytics firm S3 Partners.

The retail trading boom drove volumes in U.S. equity options to a record monthly high in January. Some investors may now be turning to “put options,” often used to protect against losses or position for declines in a stock’s price, as an alternative to shorting, analysts say.

Reporting by Tom Westbrook in Singapore and Sagarika Jaisinghani in Bengaluru; Additional reporting by April Joyner, Chuck Mikolajczak, Lewis Krauskopf, and Saqib Iqbal Ahmed in New York, Nandita Bose in Washington, Susan Mathew, Eva Mathews, and Uday Sampath Kumar in Bengaluru and Thyagaraju Adinarayan in London; Writing by Nick Zieminski; Editing by Vidya Ranganathan, Jane Wardell, Bernard Orr, and David Gregorio; Reuters

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