- GameStop’s stock began the week by spiking on a board-of-directors shake-up.
- That price action eventually exploded into an all-out battle between online day-traders and short-sellers decrying the share gains.
- Those short-sellers – including the renowned Citron Research – argued prices will crash soon. But Reddit traders had other ideas as they bid the stock up to levels that triggered a halt in trading.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
It started with a letter from Ryan Cohen, the founder of online pet-supply retailer Chewy and an activist investor in GameStop.
Cohen, who also serves as a managing member of RC Ventures, wrote to GameStop on November 16 urging the company to pivot to online sales should it want to stay afloat. Nearly two months later, Cohen got his wish. GameStop agreed with RC to add three new directors, including Cohen, to its board.
Investors largely viewed the January 11 shake-up as a positive for GameStop. Shares gained nearly 13% and continued to climb the following session. That’s right around when Reddit picked up the scent.
Members of the WallStreetBets subreddit rushed into the stock on January 13, praising the move and calling on each other to squeeze short-sellers out of their bearish positions. GameStop closed 57% higher that day. By the time markets closed on January 14, GameStop shares had doubled from two days prior.
Read more: GOLDMAN SACHS: These 22 stocks still haven’t recovered to pre-pandemic levels – and are set to explode amid higher earnings in 2021 as the economy recovers
‘Hold, my bully boys, hold’
WallStreetBets has targeted stocks before. The community played a part in Hertz’s bankruptcy-fueled rally in 2020 and has pumped-up names including Plug Power, AMD, and Nio. Tesla is a perennial favorite in the forum, partially due to Elon Musk’s unconventional humor and online presence.
Yet past schemes to create Internet-driven momentum trades typically died off in a matter of days. The retail traders would hop in, ride out a steep climb, and quickly flee the stock once they felt the rally was collapsing.
GameStop has been different. Shares fluctuated around a new support level of $39 at the start of the week. At the same time, more and more posts on WallStreetBets urged traders to hold off on selling and keep the rally alive.
One user allegedly turned a $785,000 options position in GameStop into a nearly $4 million profit. Another penned an original sea shanty documenting their successful effort to push shares higher.
“The price blew up, the shorts dipped down. Hold, my bully boys, hold,” Reddit user quigonshin sang.
Enter the short
The buying frenzy intensified further on January 19 when renowned short-seller Andrew Left of Citron Research revealed his bearish take on the stock. Left tweeted he would live stream on Wednesday and give five reasons why GameStop would crash to $20. The stream was delayed once due to President Joe Biden’s inauguration and again on Thursday due to what Left described as repeated attempts to hack into Citron’s Twitter account.
In a Thursday video, Left described GameStop as a “failing, mall-based retailer” and mocked the online traders fueling its recent gains.
“The amount of people who are so passionate about putting GameStop higher not based on any fundamentals – 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 says he sees ‘fresh deterioration’ in the market indicator that first signaled the 1929 and 1987 crashes – and warns that stocks are ripe for a 70% drop
If GameStop’s gains in the previous week lit the fire, the subreddit’s newfound rivalry with Left was napalm. WallStreetBets’ main feed was filled with posts chiding Left, editing the video so that he praised the retail traders, and calling on the subreddit’s members to prove his bearish thesis wrong.
By Friday morning, the day-traders of WallStreetBets won out. GameStop shot higher on a wave of unprecedented volatility and unwavering bullishness. The climb was so rapid that, at roughly 12: 40 p.m. ET, the New York Stock Exchange halted trading.
At the time of the freeze, the stock sat 69% higher. Once trading resumed, shares climbed higher still to a 78% intraday gain before profit-taking took hold. By the end of the session, shares closed 50% higher, at $64.75.
And just 10 minutes after the market opened on Friday, Left tweeted he would no longer talk about GameStop due to alleged online harassment and hacking. The investor said that, while he stands by his thesis, an “angry mob” of shareholders prompted him to end his commentary and “walk away.”
Pain to come
The theory that the rally was purely a short squeeze butts heads with Friday data. Nearly 72 million shares were shorted at the end of the week, or about 140% of GameStop shares available for trading, according to data from financial analytics firm S3 Partners. The last seven days saw shares shorted climb by 883,000 shares as more investors line up to profit in the event that GameStop plummets back to earth.
Yet Friday’s extraordinary surge 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, which includes a $1.6 billion hit on Friday alone.
What began as a short-squeeze is now a “vice-grip of mark-to-market losses which will force both older and new shorts to reconsider their conviction in this trade,” Ihor Dusaniwsky, managing director of predictive analytics at S3, told Business Insider in an email.
“More than likely, the short trades will be killed off with no chance to respawn,” he added.
A portfolio manager who has invested in SPACs since 2007 recounts their evolution from ‘financial backwater’ then to ‘feeding frenzy’ today – and shares how to identify attractive ones, including 3 on his radar
Now read more markets coverage from Markets Insider and Business Insider:
US business activity picks up as manufacturing gauge hits record high, IHS Markit says
US consumer spending leaps as late-December stimulus hits households, Bank of America says