- GameStop and AMC made a comeback this week, in an echo of the Reddit-driven meme-stock frenzy earlier in the year.
- As short-squeeze candidates, their trading volumes typically rise when their prices break above recent highs, an analyst said.
- Four market experts explained what was behind this week's meme-stock volatility.
- See more stories on Insider's business page.
GameStop and AMC share prices briefly flared up again this week, injecting some spark into an otherwise lackluster market - and there are explanations for the meme stocks' surprise return, experts say.
Trading volumes ballooned for both stocks, the darlings of the Reddit crowd, as automatic "stop-loss" orders kicked in. That helped send their share prices soaring on Tuesday by the most since June, by 37% to $225 for GameStop and 26% to $47 for AMC.
Being short-squeeze candidates, shares in both companies usually see larger volumes of buying when their price breaks above recent trading highs. That's because when traders or funds short a stock, they usually have their stop-loss orders set to kick in once that level is crossed, market analyst Danielle Shay explained.
"If the stock approaches recent highs, they know they are wrong. And they have to buy to cover to exit the position, causing volume buying to come in," Shay, director of options at Simpler Trading, told Insider.
When a stock hits a recent high, that grabs the attention of retail traders like those on Reddit's Wall Street Bets. The combination of short-covering and that retail momentum prompts upward buying pressure, Shay said.
For GameStop, there's another factor. The online-game retailer historically trades higher before an earnings release, and its second-quarter report is due September 8.
And there's another theory for AMC and GameStop's surge last week: Retail purchases were ready and waiting to be made again. Both stocks rose simply because the technical setup was in place for a run higher, according to Jake Wujastyk, chief market analyst at TrendSpider.
"There is a large volume shelf shown on both names, which created a base for price to 'launch' off of," he told Insider.
Prices may have nothing to do with underlying value
To further explain what happened, Brian Barnes, CEO and founder of M1 Finance, quoted a message from Warren Buffett's 2008 shareholder letter: "Price is what you pay. Value is what you get."
"With things like meme stocks, NFTs, and even lumber, we've seen that price can be anything in the short-term," he said. "Short-term prices are driven by short-term supply and demand, which may have nothing to do with underlying value. "
High demand for meme stocks with a relatively fixed supply has seemed to be one driving factor for these stocks. Add to that, "meme" excitement has become part of a culture that incites a large group to buy a stock solely to affect the price, "stick it to the man," or because it's simply fun, Barnes said.
GameStop rose by about $45 per share on Tuesday. Short interest was roughly 7.5 million shares, meaning short sellers lost about $340 million on Tuesday for this stock alone.
But aggregate losses were spread over a large and varying group. Even though the losses were significant, the US equities market represents roughly $50 trillion. That makes this a tiny, even though entertaining, aspect of the overall market, Barnes said.
Only sentiment, no fundamentals
While AMC and GameStop have been dominant names in the meme crowd, other stocks such as BlackBerry and Clover Health were among the most hyped stocks on Reddit this week. The meme-stock pump has been similar to the crypto market, where digital assets usually head in the same direction, driven by the same factor.
"AMC and GME have been very resilient meme stocks," said Derek Horstmeyer, finance professor at George Mason University's School of Business. "Since becoming meme stocks, they have correlated together more - meaning as one goes up, the other goes up too. These movements are all based on sentiment and no fundamentals."
Still, piling into heavily shorted bets comes with downside risks. Anyone considering meme stocks should realize that large fortunes have been lost via speculation, Robert Johnson, a finance professor at Heider College of Business, told Insider.
"I view the meme stocks as a giant bubble that will burst at some point, and bubbles have been around as long as financial markets have been in existence," he said.