Op-ed: The GameStop saga is anything but a game

Brace for a freaky Friday.

If you think that the wild swings in stock prices have petered out, you’re likely in for a surprise.

Sure, GameStop did plunge 44.3 percent during Thursday’s cash session, triggering 19 trading halts along the way. However, the after-market trading session witnessed a 61.15 percent surge to push the video-game retailer’s share prices back above the psychologically-important $300 mark.

Similarly, AMC Entertainment plummeted 56.6 percent during Thursday’s regular session, before climbing 30.8 percent in late trading.

With a popular brokerage now saying it will lift some of the trading restrictions that had been imposed on Thursday, stocks that are favoured by the Reddit-army of retail traders could well see another big pop when US markets open later today.

However, futures contracts for all 3 major US benchmarks are in the red at the time of writing, suggesting that the broader stock market is set to post more losses when the cash market opens later today.

Thursday recap: a lull amidst the mania

It’s understandable how one might’ve assumed that the status quo was restored yesterday.

The S&P 500, the Dow Jones, and the Nasdaq Composite all posted gains yesterday, powered on by the usual blue-chip names such as Google and Microsoft, as the indices pared losses from Wednesday’s selloff. Popular brokerages that were used as a conduit for the retail craze stepped in with trading restrictions for some of those stocks in question. That helped push the VIX index, also known as Wall Street’s “fear” gauge, away from its 3-month high to drop back below the 30 mark (although it then ticked up higher later).

Meanwhile, Wall Street hedge funds, which are the source of ire of these day traders to begin with, went back to their money-making ways. Stocks favoured by hedge funds jumped 4 percent, judging by the Goldman Sachs Hedge Industry VIP ETF, while a basket of the 50 stocks with the highest short interest posted a 9 percent drop to mark its biggest single-day decline since March 2020.

Key questions (so far) from the mania

• What’s the big fuss? How could this affect me as an investor?

This week’s mania may have opened pandora’s box. While one can argue that what we are witnessing now is a further democratization of the financial markets, it also risks inducing disorder in other asset classes as well (silver prices spiked at the behest of some Reddit chatter on Thursday, albeit only for a short while).

Such price dislocations pose a threat to any investment plan.

At risk of sounding alarmist, who knows which asset could be targeted from here on out. Despite other market participants not sharing the same moral code as this WallStreetBets crowd, these unsuspecting investors could be burned as well.

• What happens to “fundamental analysis” and the “price discovery mechanism”?

The stock investing community has long touted the virtues of fundamental analysis when it comes to determining the value of a public-listed company in the markets. For example, a profit-making company with high growth prospects tend to see its shares climb. When a company shows signs of financial distress, the share price falls. Such is the “rational” approach.

That notion has been dramatically challenged, even amidst the throes of the pandemic as stock markets around the world staged a stunning rally since March 2020. That was despite many businesses being left reeling from lockdowns around the world.

This upending of traditionally-held price-finding mechanisms has been taken to another level during this latest frenzy. “Forget the fundamentals, the ‘righteous’ mob shall dictate prices,” appears to be the day trader’s refrain.

This feud between traders and Wall Street threatens to leave market valuations to whims and emotions. Longer-term investing plans based on fundamentals could be upended by whatever story or narrative that is to be concocted on social media.

• Could we see a price crash for GameStop, AMC Entertainment, etc.?

It is a possibility. Past manias have taught us that such episodes tend to have a painful ending, at least for some investors.

But only time will tell whether the share prices will eventually return to reflect the true state of affairs at the likes of GameStop (which posted net losses in 5 out of its last 6 financial quarters) and AMC Entertainment (forecasted net loss of $4.2 billion in 2020). Or if the mind-boggling stock surge can be sustained by the willpower of the fervent masses.

However, these are unusual times, to say the least. Such a mass-coordinated effort has never been witnessed to this scale before. Coupled with the fervor evident among these traders who are hell-bent on teaching Wall Street a “lesson”, and you have a potent force behind these stocks.

In short (no pun intended), it remains to be seen where the balance of power will tilt: either in Wall Street’s favour or will retail traders triumph. It depends how much ammo (financial capital and will power) these traders have versus the establishment’s arsenal.

• What’s next? What should we look out for?

We eagerly await to see if the US Securities and Exchange Commission will intervene, even as US lawmakers have waded into the controversy. Two leading committees in Congress have pledged to hold hearings on the stock market’s wild gyrations, which could open up an epic debate about the ideals and limitations of a free market.

What’s clear is that retail traders are truly a force to be reckoned with, and institutional investors and regulators are waking up to the fact. It’s how they respond that would determine the next chapter in this saga.