Do GameStop and AMC Qualify as Episodic Pivots?
The move was big enough, but a key piece was missing
Today we saw the return of the meme stock rallies. We saw GameStop ( GME 0.00%↑ ) and AMC ( AMC 0.00%↑ ) both rose about 80% on the day as investors flooded into these names. And they did so on heavy volume. Look at these two charts.
These are outsized moves. Some of which were likely short-sellers scrambling to cover their positions. This spread to many other highly shorted names like TRUP, LMND, and RIVN which climbed in tandem with these kings of memes. Reddit ($RDDT) also caught a bid as they are likely getting a surge of traffic as people see what’s on the WallStreetBets forum.
Here we talk a lot about episodic pivots and invest in these explosive setups. We’ve done pretty well over the past couple years with a compounded average growth rate (CAGR) over 30%. That beats a majority of hedge funds. And I don’t charge you the 2% and 20% fees.
The question on readers is do these moves qualify as an episodic pivot?
We Have the Big Move, but What’s the News Catalyst?
This is the question we have to answer. And the news catalyst is pretty weak. The reason for the move is that after three years of going incognito, the Twitter Handle @TheRoaringKitty came back and made a post. This overjoyed the Redditors and people bought the hell out of GME last night and today.
Now TheRoaringKitty has no affiliation with Gamestop. He has no insider knowledge. He is merely an internet meme-ster who got famous for his Gamestop talk in the massive 2021 runup. He was one of the biggest cheerleaders of the company.
If you consider the return of @TheRoaringKitty to be a material news event, then yes it qualifies as an episodic pivot. But if you don’t, we are missing that news catalyst.
But That Doesn’t Mean These Can’t Go Higher
Anyone who followed the meme rallies in 2021 knows these stocks can go higher. A lot higher. Gamestop went from about $2 to $400 in that period. I doubt it will go that high again, but it can go higher.
About 24% of the company’s shares are currently sold short. That’s a lot of people who have to buy back the stock. And after this big move, I wouldn’t be surprised if a few people got margin calls. That means their broker will require holders to either put more money in their accounts or close that position. Those that close a short have to buy a share – which will push prices higher. That’s how “short squeezes” happen.
It's worth noting that in 2021 about 110% of Gamestop’s float was sold short. So there was a chance, if nobody at all wanted to sell, there wouldn’t be enough shares for the shorts to cover. That could send the stock to crazy high levels. And it might have happened if Citadel and others didn’t get the exchanges to halt trading in GameStop for hours at the peak.
In full disclosure, I bought some shares of GME this morning and am down to a quarter position. And I also hold a few AMC calls. I believe we’ll see a spike tomorrow because of those margin calls. But I will be taking profits if things get crazy.
I have profit targets of $50 on GameStop and $9.50 on AMC. Those are technically important levels. And where we’d likely see a lot of supply open up.
But for anyone playing these stocks. Be very careful. We will see extreme volatility in these names. And they can easily fall back to where they traded last week. You could easily lose 50% of your position. So size carefully. And obey your stops.
If you’re trading these stocks, one thing to watch carefully is the volume weighted average price (VWAP). You should carefully watch the daily VWAP and the anchored VWAP to the premarket action today. You can see in the chart below that GameStop held this level throughout the day. All the dips stopped at AVWAP.
AMC didn’t have any pullbacks large enough to tap VWAP, but you can see once it broke through it around 10 am this morning, it never looked back.
That’s one indicator to watch to manage risk. But nothing is foolproof. Expect volatility. Embrace it and if you catch the trend right, you’ll make some good money. But volatility is a double-edged sword. It cuts both ways.
I don’t have any new official trades for y’all this time around. A lot of the big moves today are from heavily shorted names, but I’m close to pulling the trigger on a few trades. I’ll let you know if any new trades set up.
Happy Investing.