GameStop (GME) shares soared than 130% before coming back down to sit above 100$/each by mid-session on Monday following a crush on short-sellers. The stock was temporarily halted for trading throughout the morning, and at one point, even dipped into red territory.
On Friday shares of the video game retailer closed 51% higher as short-sellers and reddit WallStreetBets users clashed causing a massive short squeeze on the stock. A short squeeze forces those who bet against the stock to buy in order to forestall bigger losses, sending the stock price much higher.
On Friday veteran trader Brian Shannon warned short-sellers against trying go against a stock like GameStop when it’s up too much.
“They’ll try to go in and short the stock, and then the stock rallies 10%, and they cover. And then what happens is it becomes a perpetual short squeeze machine,” Shannon told Yahoo Finance.
“If you look at short interest numbers, they’re rotating extremely fast right now. It’s a game of musical chairs. If you’re involved in it, if you’re looking to short it, wait for it to break down. There’s no such thing as up too much, “ said Shannon.
On Monday the stock was stripped of its only Outperform rating by Telsey Advisory Group. Analyst Joseph Feldman double-downgraded the stock to Underperform with a price target of $33 — currently the highest street price prediction.
The lowest price target on the stock is $3.50 by Credit Suisse analyst Seth Sigman. GameStop shares now have 4 holds and 4 sell ratings.
The story behind last week’s massive spike involves a response to short seller Citron Research’s recent prediction that shares of the video game retailer will drop to $20 a piece. Last Tuesday Citron’s managing partner Andrew Left announced he would list five reasons why the shares will plunge.
Reddit users dubbed WallStreetBets (WSB), a forum on the message board platform, pushed back on Left’s call and apparently helped create a massive short squeeze on the stock.
“I’ve never seen such an exchange of ideas of people so angry about someone joining the other side of a trade,” said Left in a YouTube clip last Thursday. He went on to list the reasons why he thinks the stock will go down to $20/share.
The reaction from retail investors, Reddit users and the like sent the stock up more than 100% last week. On Friday, Reddit WSB users were celebrating the stock’s squeeze to record highs.
Also on Friday, Left said he would stop commenting on the stock.
“We are investors who put safety and family first, and when we believe this has been compromised, it is our duty to walk away from a stock,” Left wrote in a letter posted on Twitter.
The stock had been trending higher prior to last week. On January 12th shares were trading around $20/each after GameStop announced Ryan Cohen was joining the board of directors. Cohen is an activist investor and co-founder of pet retailer Chewy Inc (CHWY).
By comparison the stock was trading around $4/share in July of last year.
Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre
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