Gamestop (GME): Four lessons from the failed(?) small traders' rebellion
Matt Weller, CFA, CMT January 28, 2021 2:15 PM
What lessons can traders draw from this week's volatility in Gamestop (GME)?
“Will you join in our crusade? Who will be strong and stand with me?
Beyond the barricade is there a world you long to see?
Then join in the fight that will give you the right to be free!
Do you hear the people sing? Singing a song of angry men?
It is the music of a people who will not be slaves again!
When the beating of your heart echoes the beating of the drums
There is a life about to start when tomorrow comes!”
- Les Miserables
The timeless novel and musical Les Miserables follows a group of young 19th century Parisians who sparked an ill-fated revolution against the established French monarchy. The story climaxes with the idealistic but under-resourced rebels getting massacred by the full force of the French military in the “June Rebellion” of 1832. The story offers countless clear parallels to the current battle between communities of small traders like the “WallStreetBets” subreddit (r/WSB) and Wall Street hedge funds over stocks like Gamestop (GME) and AMC Entertainment (AMC).
Starting earlier this month, small-time traders coordinated their purchases to manufacture a “short squeeze” in these names, forcing large hedge funds to close out their short positions en masse and driving Gamestop up 1600% over the last two weeks alone. Underlying these purchases was a widespread desire to “punish the rich fund managers” and “take back the power from Wall Street bankers.”
See our piece “What is GameStop and why did it trigger a short squeeze” for a primer on this week’s move in the stock.
Like the French military in Les Miserables, Wall Street struck back in force this morning, with many major brokerages restricting trading in these names, cutting off the flow of buying pressure that had put big hedge funds on the back foot. While communities like r/WSB are vowing to continue the fight, the -70% intraday drop in GME off yesterday’s peak suggests this rebellion against the proverbial “Wall Street Fat Cats” has petered out.
So what lessons can traders draw from the GME drama?
1) In the immortal words of William Goldman, “nobody knows nothing.” Absolutely no one predicted the magnitude and scale of the recent moves in these stocks, so be wary of anyone (including your humble(d) author) who proclaims to know what’s going to happen next. We truly live in unprecedented times.
2) Individual stocks can have explosive moves to the upside as well as the downside. Especially when a stock is seeing high levels of short interest, individual stocks can surge as quickly as they can collapse. Perhaps traders need to revisit the old trope that “stocks take the stairs on the way up and the elevator on the way down” – in our current environment, individual names have been more often taking a supercharged elevator in both directions!
3) Regulation is coming down the pipeline…eventually. Regulators including the SEC may well try to “make an example” out of the loudest voices coordinating the short squeezes, though prosecutions and new laws usually take longer than expected. As usual, high-ranking fund managers will almost certainly get no more than a proverbial “slap on the wrist” for similar actions.
4) This may not be the end. Despite the cynical tone this article takes toward small traders seeking to upset the status quo, it’s clear that there’s a broad frustration with distribution of power and wealth in the US and globally. Perhaps these disenfranchised citizens will pursue their trading agenda on decentralized alternatives or push for new laws through political channels to limit some of Wall Street’s greatest excesses.
After all, the failed rebellion in Les Miserables did set the groundwork for the ultimately successful French Revolution of 1848 – will we see something similar happen here?
Source: TradingView, GAIN Capital
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