We Need to Talk About GameStop
Welcome to the Rude Awakening for January 25, 2021…
We are in the thick of earnings season once again, and that’s going to create a lot of opportunity coming up.
But first, we have to talk about GameStop Corp. (GME)…
The stock had spent most of the last year treading water, trading around the $5 level.
Today, it’s trading above $100.
This comes off a slow build starting last September, and a big runup last week, where the stock exploded up to the $40 level, getting as high as $76.76 on Friday and closing at $65.01.
WHAT Is Going on with GME?
It’s all about the short interest.
When I ask people, what is it that moves stocks up and down?
We hear all kinds of things that drive markets and individual stock movements. Earnings, the economy, job numbers, interest rates, the Fed, major news events… all these things are part of the equation that leads to market moves.
But, you can boil all of that information down into a very simple, one line item…
Supply & Demand
When more people want to buy than sell, stocks go up. When more people want to sell than buy, stocks go down.
So, what on earth has happened with GME?
It’s a short interest squeeze. We have seen this in TSLA, Beyond Meat, a lot of the pot stocks in 2018 — they BLAST to the upside because of major inflows of short sellers.
This might lead you to wonder… How do you find these trading opportunities and what exactly is happening here?
Well, when you short stock, you borrow it from your broker and sell it to someone at a price hopefully higher than when you have to buy it back and cover the amount you borrowed. You then pocket the difference. It’s the exact opposite of buying.
And so, if you go to GME on Yahoo Finance, and click on the statistics page (click here to see) you’ll see some very interesting numbers.
You can see that there are about 70 million shares outstanding, and the average 10-day volume has been nearly 82 million… more shares are moving than there ARE shares to be bought.
The average amount over 3 months is still quite high in ratio. But more recently it’s gone off the charts.
Now, you can think of it like this: the whole entire ownership of this company is changing hands every single day, over and over again.
What’s even more interesting is if you scroll down a bit to see the percentage of SHORT shares…
It’s at 102.8%! There is an overabundance of short sellers in this GME market.
There isn’t enough stock available to balance this out, and that’s why you’re seeing this stock explode.
And so, looking at the amount of shares shorted in a company is a contra indicating way to find trading ooportunies.
If a company is highly shorted, it doesn’t take much to get a short squeeze.
So, when buyers start coming in, driving up the price, the only way for short sellers to stop the bleeding and protect losses is to buy in themselves.
That creates an order frenzy, and with only buy order and no sell orders, it causes the price on a stock to skyrocket.
So, check out the short interest in stocks to guage short positions you might want to enter.
High percentages of shorting might be a contrarian indicator that a stock is set to explode higher. And maybe you shouldn’t be shorting but instead buying!
Have a great, safe trading day.
See you tomorrow!
Editor, Rude Awakening