Is the trading in GameStop and AMC a major risk? Analysts weigh in

A mania is under way on Wall Street that is being heralded by some as a revolution of individual investors against pros, but there are concerns that the recent flurry of activity — powered by traders using forums on platforms such as Reddit and Discord — signals a top to the market, or, even worse, a systemic risk to the delicate foundation of markets where valuations are already considered inflated.

The surge in prices of companies like videogame retailer GameStop Corp.
GME,
+134.84%

and movie-theater chain AMC Entertainment Holdings Inc.
AMC,
+301.21%

are partly due to the fact that more than 100% of the shares available for trading, known as the “the float,” had been borrowed by short sellers to bet against the stocks. The Wall Street Journal described the recent moves as a war that has broken out between professionals losing billions “and the individual investors jeering at them on social media.”

The stratospheric ride has GameStop shares up more than 1,700% in January alone, as social-media traders on Reddit with long positions bandy together to knock around Wall Street firms. Shares of AMC surged 301% on Wednesday, bringing its return in the first 17 trading days of 2021 to an eye-popping 840%.

At least one hedge fund, Melvin Capital, closed out its short position in GameStop on Tuesday afternoon and suffered major losses, its manager told CNBC in an interview.

Here’s what some Wall Street types are saying about the recent moves and the risk of its spilling over into the broader market:

• “The price action is completely divorced from fundamentals. It’s a relatively small universe of retail investors that are pushing around a relatively small universe of stocks so at the end of the day, this Reddit army they don’t have the wherewithal to sustain these big losses…It’s not going to be the institutions [left holding the bag]…it’s the kids on my basketball team asking me about how options work,” Jason Katz, a UBS managing director and star portfolio manager, told Fox Business during a Wednesday interview.

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• “The marketplace should be a place where risk is taken, but not reckless risk and not a situation that undermines the system, and that’s what we’re looking at here,” Massachusetts Secretary of the Commonwealth William Galvin told CNBC on Wednesday.

• Of the overall market, Michael Wilson, chief U.S. equity strategist at Morgan Stanley, described in a late Wednesday interview the recent market action as possibly a health development in a CNBC interview.

“A lot of these heavily shorted stocks running up…and that always leads to some degrossing. Look, this is a health development, in my view. We’re still very bullish about the economy this year and we’re very constructive on equities going into 2021. But let’s be honest, we’ve had a heck of a move and we’ve discounted a lot of good news and so a good consolidation is exactly what we need,” Wilson said.

• “A short squeeze in a security named GameStop forced several hedge funds to liquidate other securities to cover their losses. GameStop was up 125% today alone. Also, the action in GameStop caused other investors to back away from they thought was a crazy and irrational market,” wrote independent market analyst Stephen Todd, in a research note.

• “The Reddit army should prepare for stricter rules and regulation shortly, which should kill the idea that what happened with GameStop will happen with others,” wrote Edward Moya, senior market analyst at Oanda.

Indeed, already a number of retail brokerages have imposed restrictions on investing in a number of popular stocks like GameStop and AMC.  

The action in those names helped to weigh on market sentiment, with the Dow Jones Industrial Average
DJIA,
-2.05%

and the S&P 500 index
SPX,
-2.57%

suffering their worst one-day declines since late October, according to FactSet data.

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