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- GameStop’s action started the week with a board boom.
- This price action eventually exploded into an all-out battle between online day traders and short sellers decrying stock gains.
- These short sellers – including famed Citron Research – have argued that prices will collapse soon. But traders on Reddit had other ideas by submitting the action to levels that triggered a halt in trading.
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It all started with a letter from Ryan Cohen, the founder of online pet supplies retailer Chewy and an activist investor in GameStop.
Cohen, who is also a managing member of RC Ventures, wrote to GameStop on Nov. 16 urging the company to look to online sales if it wanted to stay afloat. Almost two months later, Cohen made his wish come true. GameStop has agreed with RC to add three new directors, including Cohen, to its board.
Investors widely viewed the January 11 upheaval as a positive for GameStop. Stocks gained nearly 13% and continued to climb the following session. That’s about when Reddit caught the scent.
Members of the WallStreetBets subreddit rushed into action on January 13, hailing the move and calling on each other to take short sellers out of their bearish positions. GameStop closed 57% higher that day. By the close of markets on January 14, GameStop’s shares had doubled from two days earlier.
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‘Here, my bullies boys, here’
WallStreetBets has already targeted stocks. The community played a role in the rally fueled by Hertz’s bankruptcy in 2020 and swelled names like Plug Power, AMD and Nio. Tesla is a perennial favorite on the forum, in part because of Elon Musk’s unconventional humor and his online presence.
Yet past plans to create dynamic internet-based exchanges have generally vanished within days. Retail traders would get on board, climb over a steep climb and quickly flee the stock once they sensed the rally was collapsing.
GameStop was different. Shares fluctuated around a new support level of $ 39 earlier in the week. At the same time, more and more posts on WallStreetBets urged traders not to sell and keep the rally alive.
One user would have turned a $ 785,000 options position in GameStop into a profit of almost $ 4 million. Another wrote an original slum documenting their successful efforts to push the actions higher.
“The price has exploded, the shorts have come down. Here, my bullies boys, wait,” sang Reddit user quigonshin.
Enter the short
The buying frenzy escalated further on January 19 when notorious short seller Andrew Left of Citron Research revealed his bearish position on the stock. On the left, he tweeted that he would broadcast live on Wednesday and give five reasons GameStop would crash at $ 20. The stream was delayed once due to President Joe Biden’s inauguration and again Thursday due to what Left described as repeated attempts to hack Citron’s Twitter account.
In a video on Thursday, Left described GameStop as a “bankrupt mall-based retailer” and poked fun at the online traders fueling its recent gains.
“There is nothing fundamental about the number of people who are so passionate about taking GameStop higher – it just shows the natural state of the market right now,” he added.
Read more: A notorious market bear who called the dot-com bubble said he saw a “ further deterioration ” in the market indicator that first signaled the crashes of 1929 and 1987 – and warns stocks are blackberries for a drop of 70%.
If GameStop’s earnings the week before lit the fire, the subreddit’s new rivalry with Left was napalm. WallStreetBets’ main feed was filled with posts berating Left, editing the video to congratulate retail traders and calling on members of the subreddit to prove his bearish thesis was wrong.
On Friday morning, WallStreetBets day traders won out. GameStop pulled higher on an unprecedented wave of volatility and an unwavering bullish trend. The rise was so rapid that at around 12:40 a.m. ET, the New York Stock Exchange went out of business.
At the time of the freeze, the stock was 69% higher. Once trading resumed, stocks climbed even higher to reach an intraday gain of 78% before profit taking set in. At the end of the session, stocks closed 50% higher, at $ 64.75.
And just 10 minutes after the market opens on Friday, left tweeted he was no longer talking about GameStop due to allegations of harassment and online hacking. The investor said that as he maintained his thesis, an “angry mob” of shareholders prompted him to end his comments and “walk away.”
Pain to come
The theory that the rally was pure head press with Friday’s data. Nearly 72 million shares were sold by the end of the week, or about 140% of GameStop shares available for trading, according to data from financial analysis firm S3 Partners. The past seven days have seen sold stocks climb 883,000 shares as more investors lined up to profit in case GameStop comes back to earth.
Yet Friday’s extraordinary push only intensifies the pain already felt by GameStop bears. Short sellers have already absorbed more than $ 3.3 billion in mark-to-market losses on the stock, including a hit of $ 1.6 billion as of Friday alone.
What started as a short-squeeze is now a “vice-grip of mark-to-market losses that will force old and new shorts to reconsider their belief in this business,” said Ihor Dusaniwsky, CEO of the predictive analytics at S3 Business Insider in an email.
“More than likely, short trades will be killed with no chance of recurring,” he added.
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