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The Decline of the GameStop Rally and Meme Stocks
The recent GameStop rally experienced a significant setback, with shares of the video game retailer plummeting almost 10% in pre-market trading on Thursday, following an 18% decline the previous day. Likewise, fellow meme stock AMC witnessed a nearly 6% drop on Thursday, after a 20% decrease on Wednesday.
The Rise and Fall of Meme Stocks
Meme stocks have gained popularity as company shares that attract widespread attention online, leading to fervent trading by individual investors. Such stocks, including GameStop and AMC, often experience dramatic price surges regardless of the underlying performance of the companies. These surges typically cause challenges for hedge funds and short-sellers, who profit from betting against stock prices.
Earlier this week, GameStop and AMC saw significant surges in their share prices following a post by investor Keith Gill, also known as “Roaring Kitty,” on an online platform. Gill’s post was interpreted as a signal for traders to start buying GameStop shares again, resulting in a rapid increase of almost 75% in the company’s stock price. The momentum continued with GameStop shares closing 60% higher the following day, sparking a broader rally in meme stocks.
The recent market dynamics have diverged from the previous GameStop frenzy in early 2021, driven by social media-driven speculation led by Gill and other online influencers. During the COVID-19 pandemic, investors flocked to meme stocks, causing GameStop’s shares to surge over 1,000% in a short period. However, the current resurgence in meme stock trading appears to have a shorter lifespan, as evidenced by the swift decline in share prices over the past few days.
According to Dan Egan, the head of behavioral finance at investment advisor Betterment, the latest meme stock rally was expected to be brief compared to the sustained momentum witnessed during the pandemic-induced trading frenzy of 2021.
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