Wall Street's retail frenzy deepens as GameStop extends rally

(Reuters) – Individual investors continued to pile into niche stock market plays on Tuesday, causing a scramble by short-seller funds to cover losing bets, with companies like GameStop skyrocketing for the fourth straight day even as others caught up in the buying frenzy reversed gains.

Etsy was up as much as 8.6% in GameStop’s slipstream but later reversed its gains, and BlackBerry was another early buying focus in this increasingly influential corner of Wall Street.

The surge in recent days – GameStop has increased more than six-fold to about $122 from $19 since Jan. 12, while BlackBerry Ltd has shot up 172% this year – has spurred concerns over bubbles in stocks that hedge funds and other speculative players had bet will fall in value.

Trading of GameStop stock was halted for volatility nine times on Monday and three times on Tuesday.

To some on Wall Street, the moves have also begun to look symbolic of a stock market that may be overvalued at the end of a year dominated by floods of fiscal and monetary stimulus to ease the coronavirus crisis.

“This is hardly an environment where informed investors are transacting to establish price discovery,” said Mike O’Rourke, chief market strategist at JonesTrading.

The benchmark S&P 500 has gained more than 70% since March, with analysts putting moves in share prices of several loss-making firms down to herds of amateur investors chasing tips from Reddit discussion threads or the private Facebook group “Robin Hood’s Stock Market Watchlist”.

“I don’t think this is a fad, it is a generational shift in how people think about investing their money,” John Patrick Lee, ETF manager at VanEck.

“A retail trader will not lean on Wall Street to manage their money and I definitely now see an antagonistic relationship between the old guard (Wall Street) and individual traders who are on the rise,” he said.

Venture capital investor Chamath Palihapitiya said in a tweet that he had bought $115 call options on GameStop on Tuesday morning after an exchange with Reddit founder Alexis Ohanian.

GameStop gained 22% to $93.70 in morning trade, well below Monday’s intraday high of $159.18, but extending its winning streak to a fourth straight session.

According to analytical firm S3 Partners, short sellers in GameStop are down $5 billion on a mark-to-market, net-of-financing basis in 2021, which included $876 million of losses early Tuesday.

“GME shorts and longs are in a knockout battle being waged in the stock market as well as social media platforms,” wrote Ihor Dusaniwsky, S3’s managing director of predictive analytics.

Another highflyer, Virgin Galactic Holdings, was up 19% on the day on Tuesday at about $43, and about 81% on the year to date.

The broader U.S. stock market was about flat.

A BAD END

Much of the action has centered around shares that have been heavily “shorted” by other market players – traditionally an area dominated by hedge funds.

Shares in Evotec rallied 8% on Tuesday with three traders reporting that hedge fund Melvin Capital Management was closing its short positions after suffering losses on some bets.

Melvin previously held a 6.2% short bet against Evotec, according to filings with the German regulator. The fund did not respond to requests for comment.

Short sellers typically bet against stocks of companies that they view as outdated in their business models or otherwise overvalued. BlackBerry shares early Tuesday traded at a 12-month forward P/E ratio of 117.22, while online retailer Etsy has a multiple of 93.44.

By contrast, Apple Inc, the world’s most valuable publicly listed firm, had a 12-month forward P/E ratio of just 34.46 as of early Tuesday.

Etsy leapt on Tuesday after Tesla Inc Chief Executive Officer Elon Musk, also often a focal point for social media-savvy traders, endorsed the company in a tweet.

Finnish telecom network equipment maker Nokia was up about 24%, while headphones maker Koss Corp jumped 71% to its highest since April 2006, up nearly 200% this year.

Investor Andrew Left is as convinced as ever that GameStop is a dying business and its stock price will fall sharply. Left shorted the company’s stock when it traded around $40 a share and forecast publicly that it would tumble to $20 a share. He said on Tuesday that he was still short the stock.

“Will it end badly? Sure. We just don’t know when,” said Thomas Hayes, managing member at Great Hill Capital LLC in New York.

Source: Read Full Article