Stock Market

Rally of Meme Stocks: A Brief Resurgence Fizzles Out Quickly

The resurgence of meme stocks that dominated headlines in 2021 exhibited a flicker of its former glory earlier this week as retail investors briefly returned to the fray. GameStop Corp. and AMC Entertainment Holdings Inc., which were at the heart of last year's trading frenzy, experienced a sudden increase in their share prices. However, this renewed interest evaporated almost as fast as it arrived, with the majority of the gains rapidly diminishing as the week progressed.

Other speculative areas of the market, particularly those stocks that have been the target of short-selling hedge funds, similarly witnessed transient surges in value. Despite the fleeting upswings, they largely failed to sustain momentum in the face of a broader US stock market climbing to new heights.

The Spark of a Meme-Stock Moment and its Rapid Dissipation

The initial spark of excitement began with a post on social media by Keith Gill, known better as “Roaring Kitty,” one of the primary figures behind the original GameStop stock price surge. The post whipped market enthusiasts into a trading frenzy, prompting a rush towards familiar day-trading favorites and stocks perceived as ripe for a potential short squeeze. Nevertheless, unlike the prolonged saga of 2021, this recent rally proved to be a mere blink in the market's eye.

Hopes of a repeat of last years' weeks-long spectacle were dashed as the stock values quickly dissipated. Meanwhile, AMC's stock plunged more than 60% from its intraday year-to-date high, while GameStop relinquished nearly all of its prior gains. The stark contrast between these two epochs of market fever demonstrated the transitory nature of this year's episode—GameStop's over 1,000% climb in a few days in 2021 dwarfed this week's much milder double-digit percentages.

However, it's important not to dismiss the significance of GameStop's more than 100% rally over the past four weeks too lightly. The video-game retailer has strung together a series of weekly gains, increasing its market value by approximately $3.6 billion throughout this period. But even with such an impressive sprint, the stock price remains considerably below its dizzying peak in 2021, down more than 80%.

Strategic Moves by GameStop and AMC Amidst the Trading Frenzy

In an effort to fortify their financial positions during the upswing, both companies took strategic actions. GameStop announced plans to potentially sell up to 45 million shares in an at-the-market offering, which would permit its bank to create and sell shares, with the proceeds contributing to the company's balance sheet. This move intimates a proactive approach to leveraging market volatility for corporate gain.

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AMC, the movie theatre giant that has seen better days, managed to amass over $250 million through issuing new shares and converting debt into equity. However, the company remains burdened with a debt load exceeding $4 billion, as reported by Bloomberg Intelligence. This week's trading activity has done little to alter the overall trajectory of AMC’s stock, which has plummeted about 90% over the past year.

Fleeting Interest and the Subtle Shifts in Market Dynamics

The brevity of this latest meme stock rally is underscored by the tepid continuation of investing by retail traders. GameStop experienced a surge in trading volume, with share trades exceeding 10 times the recent average, while AMC saw an impressive 1.7 billion shares traded in a single week. Yet, the financial heft of these transactions paled in comparison to 2021's explosive market movement.

Retail trading activity on platforms like Fidelity showcased a dramatic downturn from the fervor of three years prior, with sell orders nearly matching buy orders, reflecting a sense of caution or perhaps just a mirror of the market’s indifference.

Options markets also showed signs of turbulence, as short-term prices for GameStop and AMC options displayed annualized volatility rates surpassing 500% at certain moments. By the end of the week, however, these numbers halved. Some audacious traders continued purchasing GameStop call options that would only be profitable if the stock soared above $128 by Friday—a demonstration of the lingering, though diminished, hope among investors for another massive rally.

This episode beckoned the scrutiny of veteran bond investor Bill Gross, who took a position in the markets by selling straddles on both GameStop and AMC. This strategy is built on the expectation that the sharp price fluctuations would soon ebb, a wager that seemed prescient as the week wore on and volatility waned.

Meme Stocks and the Impact on Short Sellers

The brief elevation of AMC and GameStop's stock prices had profound implications for short sellers, who capitalize on stock depreciation. The rally engendered billions in putative losses for these investors—losses that were somewhat mitigated as share prices retracted to more modest levels.