GameStop Corp.’s rally fizzled further in premarket trading, meaning the stock has now given up about 70% of the spectacular gains that were fueled by last month’s attack on short sellers from Reddit day traders.
The stock traded at $160 as of 6:55 a.m. in New York, that’s $323 below Thursday’s record intraday peak of $483. The video-game retailer’s market value has dwindled by $22.5 billion to $11.2 billion in that short space of time, though the stock is still up more than 700% year-to-date.
GameStop’s retreat has coincided with a sharp reduction in short interest after bearish investors appeared to cover their positions. That has loosened a squeeze on the stock caused by day traders who used Reddit forums to tout and bid up out-of-favor stocks that also included movie-theater chain AMC Entertainment Holdings Inc. and American Airlines Group Inc.
“It looks like the unwind of the short squeeze, where prices will start to reflect economic reality again,” said Maarten Geerdink, head of European equities at NN Investment
Other stocks recently favored by the Reddit community are also rapidly losing air: AMC slid 25% in premarket trading and at $10 is more than 50% below last week’s intraday high. Express Inc. declined 18% and has lost about 70% of its value since peaking on Wednesday.
The declines come as short sellers reduce their interest, having sustained multi-billion dollar losses. The short interest in GameStop shares has tumbled to 39% of its freefloat, according to data from IHS Markit.
Tuesday’s drop came despite a loosening of restrictions on the amount of shares investors can buy using Robinhood Markets Inc. On Monday afternoon, the popular trading app started allowing users to purchase up to 20 shares of GameStop, up from a cap of one before the market opened.
The lower number of shares sold short could also deal a blow to day traders’ thesis that a higher stock price would only result in more gains as hedge funds who bet against the Grapevine, Texas-based company would need to cover their shorts.
Short-Seller Backlash
Backlash against short-sellers including Citron Research had been a key rallying point for retail traders using Reddit to communicate about their bets. The mania spread to companies like AMC Entertainment, which saw record volatility as trading volumes soared last week.
“The recent rally in all those names had all the symptoms and similarities to a great inefficiency created by excess shorting compared to the free float of companies and excess liquidity,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “The rise of the Reddit factor is something that is going to be with us in the future, it’s an additional factor that all hedge fund managers should cope with.”
—With assistance from Ksenia Galouchko and Albertina Torsoli.
This article was provided by Bloomberg News.