The GAMESTOP Situation Explained

What has been happening with the stock of Gamestop is a textbook example of a "short squeeze". A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.

So, how did Gamestop stock go up over 800% in the last week? Is it worth it to jump on the train? The stock went up so much because it had a large short position help by institutional investors. Stocks with a heavy short position can easily be researched online. Online investor forums such as /R/ Wallstreetbets include members that made it their mission to "talk up" the stock to get people to invest in the company thereby raising the price of the stock as people began piling in encouraged by people on the forums and justified by an increasing stock price.

The goal is to raise the price to a level where institutional investors have to sell out of their short position which will then cause another spike in the stock price as bets against the stock going down are now much less. A rising stock price also increases the market cap of the company making it appear to some uninformed investors that something good must have happened to the company making it worth investing in. The initial rally of the stock was based on nothing but smoke and mirrors at best, and this is not the company's fault. The stock was "talked up" by members of online forums on questionable projections and hopes at best, and uninformed investors gobbled it up and believed that the story for the company is looking up.

If you are in Gamestop I would advise you to get out now. The company is a takeover target at best, and not even a good one. The company's business concept is dated and there is no place in the future for a Gamestop. The fact that many young investors actually believe that there is a long term story for Gamestop is very concerning because it shows that the majority of rookie investors are not doing their homework and instead rely on random voices online. Even though most young investors have not been in a Gamestop in years.

Why is this happening? I think that the reason this is happening is the fact that today's "young" investors of around age 18-40 have a taste and the disposable income to invest in the stock market, not all but many. Millennials are the largest demographic in the US and they are eager to gain financial independence because they experienced years of recessions and financial hardship that caused their parents and themselves much grieve and trauma during the 2008 financial crisis and its aftermath. They have also witnessed and participated in the longest economic recovery in modern history and are now ready to plan and invest for their future. They seek the knowledge and capabilities to not repeat their parents' mistakes and that is where online forums like Wallstreetbets come into play. These forums have very knowledgable people in them, some are even professionals in the industry. Driving the stock up through praise is not illegal, but the people that talked up the stock beyond any short term outlook were simply playing on the ignorance of others to drive the price up to reach the ultimate goal of a short squeeze, there was never any prospect of this company fundamentals improving much beyond the short term.

What are the implications of this for the market? The market saw a massive drop on 1/27 but this is mostly related to less than expected earning and a general sense of uncertainty as the new President signs one executive order after the order that will have a real impact on the economy such as the crippling of the oil industry and the raising of the federal minimum wage. The market has been rallying for quite a bit now and a breather is necessary, the goal for real investors should be to look forward to these dips to add to positions.

I don't think that Gamestop is responsible or even has the size or importance to take down the market, short squeezes happen every day, the underlying economic conditions in the US are good and support a long term positive trend, this does not mean it will b ea straight line up (it never is). If you are up in your portfolio, take some off the top. Don't sell the entire positions but have some cash on hand so you can add to your favorite positions as they become cheaper, but don't jump the gun, let the selloff happen for at least a full day. It is a good habit to sell into strength instead of selling into weakness, as the stock goes up it is prudent to trim some to have cash on hand to buy when the stock has reached your average price or lower.

Thanks,

The Punkrock Capitalist