Meme Stocks Gamestop Impact on Financial Markets Explained

Gamestop's wild ride in January 2021 was a perfect example of the meme stock phenomenon.

The stock's price surged from $17 to $483 in just a few days, largely driven by retail investors on social media platforms like Reddit's WallStreetBets.

This sudden and unexpected price movement caught the attention of institutional investors and regulators alike.

The massive short interest in Gamestop's stock made it a prime target for retail investors seeking to disrupt the traditional market dynamics.

Gamestop's stock price was heavily shorted by hedge funds and other institutional investors, with some estimates suggesting that over 140% of the company's outstanding shares were shorted.

The retail investors, fueled by their online communities, decided to buy up the stock and drive up the price, causing the shorts to cover their positions and further fuel the price increase.

The chaos in the market was so intense that it even caught the attention of the US House of Representatives, which held a hearing to discuss the role of social media in the Gamestop saga.

The Gamestop incident highlighted the growing power of retail investors and the potential for social media to disrupt traditional market dynamics.

Meme stocks like GameStop are known for their dramatic price movements. The stock can skyrocket in a short period, but those gains can vanish quickly.

The original meme stock thesis behind GameStop's rally was that there were more shares short than shares outstanding, which would force institutional investors to cover short positions at higher and higher prices. This catalyst drove the initial phase of the GME rally.

A pump and dump through online message boards also contributed to the second leg of the 2021 rally, but it relied on a speculative buying frenzy that's no different from any other pump and dump. The last wave of "greater fool" buyers are still sitting on losses in excess of 50%.

Meme stocks like GameStop can be unpredictable, but they can also be a sign of investor complacency. The VIX, or fear index, has persistently low levels, indicating a lack of hedging by investors.

Here are some meme stocks that rallied in May:

Meme stocks can be quite volatile, and a great example of this is the rally in May. Dramatic movements are common in meme stocks like GameStop.

The rally in May was triggered by a post from Gill on X, and it led to some impressive gains for two of the most popular meme stocks. AMC soared as much as 308% in just two days, and GameStop gained 271% to its peak during the same period.

But, as we often see with meme stocks, those gains were short-lived. AMC quickly gave up its gains after announcing an equity swap to exchange 23.3 million newly issued shares for bonds worth $163.9 million maturing in 2026.

GameStop's Relative Strength Rating has actually been on the rise, entering the elite 90-plus level on December 11, 2024.

Social sharing played a pivotal role in the meme stock craze. Keith Gill, also known as "Roaring Kitty", posted an image on X, formerly Twitter, that sent stock prices soaring.

Gill's post was a meme used by gamers to signal seriousness. He followed up with a YouTube video from years ago, touting the potential of GameStop.

The video was a summary of his "bull case" for GameStop's stock. Gill's enthusiasm was infectious, and his social media presence helped spread the word about the struggling company.

GameStop was a video game retailer on the brink of collapse in 2021. Its stock was being heavily shorted by big investors, who believed it would continue to decline.

The market impact of the GameStop meme stock frenzy was significant. The stock's price surged from $17.25 to $483.00 in a matter of weeks, leaving many investors stunned.

The rapid price increase was largely driven by a short squeeze, where a group of traders, often referred to as "retail traders", banded together to push up the stock's price, forcing short sellers to cover their positions.

Financial Market Volatility can be a wild ride. The stock price of Top Financial (TOP) skyrocketed 428% in one day, from 48.60 to 256.44 on April 28, 2023.

This kind of volatility is a perfect example of meme stock behavior. The stock quickly crashed and traded for under 10 by May 2023.

A share price of 256.44 is a huge gain, especially considering the initial offering price of $5 per share in June 2022. The stock has trended even lower since, now trading around 1.60 a share.

The stock's Composite Rating stands at 10, which is a significant indicator of its volatile performance. There was no news on the company when the stock surged 65% on Feb. 9.

Market dynamics have changed significantly since the last time retail investors took on companies like GameStop. The short positions against GameStop's tradable shares have decreased dramatically, from over 140% to just over 24%.

This change in market dynamics is a direct result of the actions taken by Gill and the online army of retail investors. They successfully bought up shares of GameStop, reducing the number of short positions against the company.

The number of short positions against GameStop's tradable shares now stands at just over 24%, slightly more than the 22.5% recorded in January.

Gill's cautious messaging may be due to the scrutiny he faced in 2021, including a $4 million regulatory fine for his employer MassMutual.

Retail investors are putting themselves at significant risk by participating in the meme stock phenomenon, according to former SEC Chair Jay Clayton. He likened it to "gambling" and questioned whether it's something that should be tolerated in the markets.

Gill's tweets have been criticized for not being transparent about his reasons for being bullish on GameStop, with Clayton suggesting he should be "forthright" about his outlook.

Meme stocks are speculative plays known for high levels of unpredictability, with meteoric rises and heart-stopping crashes typically depending on social media hype and online interest.

Retail investors dominate the interest in these stocks, and hyper stock valuations depend on young fans and an anonymous following that can appear or disappear overnight.

Buying meme stocks without vetting is risky, and it's better to bring a time-tested method for stock picking and search for buy points in proper bases.

Shares of AMC have been trading along the 50-day moving average for weeks now, with the stock basically going sideways.

The meme stock has IBD Ratings that are well below ideal levels, with a Composite Rating of just 20.

A refresh of the GameStop stock frenzy is a good indication that even after the recent dip, investors are showing complacency in the face of high share valuations.

The VIX, the so-called fear index, has persistently low levels, reflecting a lack of hedging by investors.

Here are some key characteristics of meme stocks to keep in mind:

In the end, it's essential to approach meme stocks with caution and a clear understanding of the risks involved.

GameStop Cl A has seen its Relative Strength Rating enter the elite 90-plus level, a significant indicator of technical strength.

This rating is based on the stock's price performance over the past 52 weeks, with a higher rating indicating stronger price performance.

GameStop Cl A's Relative Strength Rating has jumped to 91, a notable upgrade that suggests the stock is showing renewed technical strength.

Here are some key stocks to watch, including GameStop Cl A, which has seen a significant upgrade in its Relative Strength Rating:

These stocks are showing market leadership, with GameStop Cl A earning a 93 RS Rating, indicating strong price performance.

Trading in GameStop was halted eight times before noon on Monday due to volatility.

This kind of volatility can be unsettling for investors, but it's a sign that the market is taking notice of significant price movements.

At Monday's opening bell, shares of GameStop more than doubled, and by midday, they were trading 60 per cent higher.

That's a huge jump, and it's not the first time we've seen GameStop's stock make a big move like this.

The struggling movie theatre chain AMC was also jolted higher, along with other meme stocks.