GameStop Mania Runs Wild

Last week saw what could turn out to be peak mania for the stock of GameStop, a brick and mortar seller of video games. The company has seen rapidly declining sales and increasing losses over the past few years as the internet has changed the way most video games are sold, as fewer and fewer gamers go to physical stores to buy their games. Small retail investors had developed a strategy on the message boards of the Reddit website where they bought stock, driving some hedge funds who were betting the shares would decline (short-selling) into massive losses. To unwind these trades the hedge funds who were betting against GameStop had to buy back the shares which propelled the stock even higher. Last week saw the stock rise from $65 to $325. In fact at one point last week shares hit $483.

Last week was the worst week for stocks in three months and many analysts pointed to hedge funds reducing their amount of leveraged positions (read: positions paid for by borrowing money) by up to $1 trillion. This was the biggest weekly decline in stock exposure in the last 10 years, with the exception of last March at the depths of the coronavirus market meltdown. These hedge funds sold some of the market’s biggest winners to raise cash, which was the major factor behind the S&P and Dow’s weekly losses.

Today was a different story in the markets with stocks surging. This was due to some bargain-hunting as well as signs the GameStop mania could be winding down. Including after-hours trading, GameStop’s stock plummeted from $325 to $177, a drop of over 46%. The stock could still experience a bounce higher in the short term, but looking out a few months we would expect shares to be trading under $50.

The GameStop drama overshadowed strong earnings reports last week from many companies, with Apple and Microsoft leading the way. This week the earnings parade continues with Amazon and Google among the companies reporting. Don’t be surprised if most companies continue to report stronger than expected revenue and earnings-per-share. One last note on last week’s market-selloff: investor sentiment had become overly bullish to levels that have historically signaled a market pullback. In other words, the market was due for a sell-off. Whether today was a temporary bounce with the market having further to fall in February or the start of the market returning to previous highs remains to be seen.

Turning our attention to the coronavirus, Sunday saw the lowest number of daily coronavirus cases since early November. There were 110,000 cases, a major decline from the peak of over 300,000 cases on January 8th. Also of note, cases have significantly declined in the U.K. and South Africa. This is a big deal because these countries are ground zero for two new strains of the virus that are being closely watched. Another encouraging development is the fact that cases are rapidly declining in Israel, which has already vaccinated over 55% of their population. From the BBC:

Israel's vaccination program is showing signs of working to drive down infections and illness in the over-60s. The fall appears to be most pronounced in older people and areas furthest ahead in their immunization efforts. This suggests it is the vaccine, and not just the country's current lockdown, taking effect.

While these recent trends are very positive, further surges in countries with high vaccination rates would be concerning. For now though we continue to be encouraged by the reduction in daily cases.