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Gamestop Still Soaring on Meme Rally, But Beware of End of 'Buying Frenzy'

May 14, 2024
minute read

Shares of GameStop Corp. have soared dramatically over the past two days, driven by the return of influential investor and analyst Keith Gill to social media. However, experts caution investors about the potential end of this “buying frenzy.”

Keith Gill, also known as Roaring Kitty, played a significant role in the 2021 meme-stock frenzy. His recent return to X, formerly known as Twitter, has triggered a substantial rally in shares of GameStop (GME) and AMC Entertainment Holdings Inc. (AMC), another popular meme stock.

GameStop shares surged 77% on Tuesday morning, following a 74.4% increase on Monday. The stock is experiencing a trading volume of 67.16 million shares, significantly higher than its 65-day average of 9.74 million shares. Similarly, AMC’s stock climbed 98.8% on Tuesday after a 78.4% rise on Monday, with a trading volume of 211.46 million shares compared to its 65-day average of 25.04 million shares.

Cory Mitchell, an analyst at Trading.biz, noted that the significant movement is beneficial for traders, especially when accompanied by high volume. However, he cautioned that the current upswing is driven by speculation rather than fundamentals. Gill’s recent post on X suggested he is monitoring the situation, sparking renewed interest in GameStop, reminiscent of its meme-stock peak three years ago.

“These companies are not fundamentally strong, so anyone trading them must understand they could come crashing down as soon as the buying frenzy stops,” Mitchell warned. He advised traders to use stop losses and capitalize on upward price momentum while it lasts. However, he also cautioned against being caught holding these stocks when their prices inevitably drop, as happened in 2021.

Howard Ehrenberg, a partner at law firm Greenspoon Marder, echoed similar sentiments. He pointed out that the recent surge in GameStop shares is not based on the company’s fundamental performance. “I believe this is pure speculation to try to squeeze the shorts that have always existed on GameStop,” he told MarketWatch on Monday. Ehrenberg warned investors not to be surprised if the price reverses just as quickly.

The recent rally in GameStop and AMC stocks has brought back the concept of “gamification” in trading, as highlighted by the significant surge in their stock prices. This phenomenon underscores the impact of social media and influential figures like Gill on market movements, often leading to speculative trading based on hype rather than solid financials.

The trading volume of both GameStop and AMC far exceeds their average volumes, indicating a high level of speculative interest. This kind of trading activity can create significant volatility, making it challenging for investors to navigate these stocks.

Mitchell and Ehrenberg both stress the importance of understanding the risks involved in trading meme stocks. While the potential for high returns exists, so does the risk of substantial losses once the initial excitement fades. Investors are advised to remain cautious and not rely solely on speculative trends.

In summary, GameStop Corp.’s shares have experienced a remarkable rise due to Keith Gill’s reappearance on social media, but experts warn of the potential dangers of this speculative surge. While traders may benefit from the high volume and significant price movements, the lack of strong fundamentals behind these companies means that the current buying frenzy could end abruptly, leading to sharp declines in stock prices. Investors are encouraged to use stop losses and stay aware of the risks associated with meme stocks to avoid being caught in a sudden downturn.

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John Liu
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