GAMESTOP: WILL HISTORY REPEAT ITSELF? OCBC Securities Digital Engagement Team 22 March 2021 In this article:
• After falling 90% from its intraday high of US$483 on Jan 28, traders seem to be back in business for GameStop. The retailer has seen its share price surge more than 400% since Feb 23 to Mar 10. • A brief look at trading behaviour observed and analysed across various sources focusing on GameStop points at several commonalities in both the January and end-February price surges – both strong retail sentiment on social media and the use of options trading have been particularly prevalent. • Beyond looking at GameStop, certain other retail favourite “meme stocks” too have exhibited similar behaviours and market dynamics. What happened in January 2021? Ryan Cohen By now most people would have heard GameStop’s New Director about the GameStop phenomenon. What Ryan Cohen is the co- was described widely as an epic battle of founder of Chewy, Inc. The wills that pitted the pros of Wall Street 35-year-old earned against the retail traders of Reddit, the legendary status amongst trading frenzy was kickstarted by the the Reddit community after introduction of activist investor Ryan Cohen launching the online pet into the board on Jan 11, and eventually saw retailer and taking on GameStop’s stock rocket more than 2500%, Amazon on its own turf – before collapsing 90%, all within the span of and winning. less than two months. Source: CNA From a scrappy startup Majority of news coverage1 on the trading that founded in 2011, Chewy is occurred in January surrounds how savvy retail now one of the leading pet traders identified GameStop as a potential target e-commerce platforms in the due to its high amount of short interest. The United States, valued at theory was that if traders piled in and prices more than US$30 billion. rallied, several hedge funds that held short positions in the stock would eventually be Beyond the short-squeeze squeezed out and forced to cover their positions tactics used in January, many at a high price, accelerating the price spike. behind GameStop’s surge in Ryan Cohen, GameStop’s New Director Source: Business Insider January also based their expectations on Cohen Beyond focusing only on the short squeeze however, there were also two hallmark aspects pulling a turnaround for the that were observed during January’s trading: Strong retail sentiment coordinated on social beleaguered video game media2, and the prevalence of options trading.3 retailer and spearheading its transformation toward e- The power to move the markets commerce.8 Traditionally, the power to move the market with any form of buying or selling is Source: Bloomberg attributed to large institutional flows worth billions of dollars. The retail trader on the other hand is often relegated to having to ride the wave of the ‘big boys’. In January however, the tables were turned through the use of social media and online forums such as Reddit. Members in forums such as the popular wallstreetbets numbered in the millions, allowing traders to band together and coordinate their actions, finding strength in numbers.2 Through the use of options trading and a clever bit of understanding on how market makers hedged their risk, as detailed in a recent Forbes article3, the everyday retail trader was able to further utilize the leveraged nature of options and a tactic known as a ‘gamma squeeze' to have an outsized impact on the market and GameStop’s share price.
These two characteristics – options trading, and strong retail sentiment – would come back in play once again later in February as you may discover in the later part of this article.
Page 1 of 4 A Brief Timeline of GameStop since January 2021
Mar 8: GameStop formally announces Jan 28: GameStop hits that it has tapped Chewy co-founder intraday record of Ryan Cohen to lead the company’s $483, briefly largest in shift to e-commerce Russell 2000 Index
Feb 23: GameStop Jan 11: GameStop appoints CFO Jim Bell resigns Ryan Cohen from Feb 9: GameStop sheds Chewy.com to its board about 90% in value from intraday peak, erases US$30b in value
15-Minute Candlestick Chart extracted from Bloomberg, as of 10 March 2021
The second wave that caught the market by surprise A peek into the GameStop trader Following a lull in trading activity after the initial buzz surrounding GameStop, many in the markets expected trader interest in the stock to die down slowly, eventually We observed that there is a certain relegating January’s trading activity as a one-off event destined for the history books. profile for those who traded GameStop: In the final 90 minutes of the trading session (1) Experienced – More than 95% have on February 24 however, GameStop suddenly prior trading experience in the markets reignited with a dramatic surge in price and trading volume, hurtling the stock back into (2) Adaptable – There is a good mix the public consciousness. Perhaps more between frequent and occasional perplexingly, as reported by The Independent, traders, with many coming in as trading activity for the stock picked up. The the uptick in trading seemed to be sparked by number of customers trading has a single cryptic tweet by Cohen of an ice cream almost tripled between Feb 24, 2021 4 cone, without any comment or reference. and Mar 10, 2021 alone, compared to the two weeks before What in the world was happening? And would GameStop be on its way back to the lofty (3) Generally younger – Almost 60% are heights it hit back in January? Traders were left under 40 years old, with more than 80% Source: Daily Mail scrambling for answers to make sense of the below 50 years old situation. No easy answers One explanation that surfaced and was reported on CNBC pointed at new fundamentals for the company. Since January, several new developments for the company had occurred. From a shakeup of senior executives with the resignation of CFO Jim Bell, to the official appointment of Cohen to spearhead the e-commerce transition, GameStop was taking its first steps in its long anticipated e- commerce shift and digital transformation.6
These events however were largely expected by watchers of the stock who had long anticipated some degree of transformation since Cohen had joined the board in January.6 And even if these new developments changed the fundamentals of the company, Bloomberg data shows that analysts were still pricing GameStop as heavily overvalued, with a return potential of -86.8% from their consensus target price at the end of February 2021.
A Forbes report highlights a second possible explanation – an attempt at a second coordinated attack on hedge funds who held short positions in the stock, in the same vein as January. Short interest for GameStop remained high in comparison to industry norms, at an exchange-reported 26% of equity float as of end February 2021, leaving GameStop’s shares potentially exposed to a second short squeeze. But this figure fell far below the high of 144% in Dec 2020, leaving any maneuvering room for a short squeeze to be far more limited than in January.3
As it was back in January, no easy answers seemed to exist. End-February’s uptick in trading activity was leaving more questions than answers behind. Taking cues from January 2021 There is a common saying when it comes to stock trading that “History doesn’t repeat itself, but it often rhymes”. The February price spike may not have any easy answers, but its technical and price behaviour shows a certain pattern – for all the differences that existed between the two price surges in January and February, several similarities between the two can be observed.
Page 2 of 4 Support and Resistance levels in February hitting those from January 2021
15-Minute Candlestick Chart extracted from Bloomberg, as of 10 March 2021 Key resistance and support levels in February are following those established in the month prior. Options activity has once again exploded – with the same behaviour as observed in January when surges in share volume accompanied surges in options volumes – leaving market commentators suggesting the ‘gamma squeeze’ tactics used before are once again in action. Redditors on wallstreetbets continue to coordinate the buying and holding of GameStop. The two key factors that allowed GameStop’s price to accelerate – options trading and strong retail sentiment – are once again present. Just as was reported by Forbes, January’s playbook it seems, continues to be followed.3 Trading through the volatility – Will history repeat itself? No one knows for certain if and when the upward trajectory for GameStop will continue. Key factors that can be seen in the GameStop saga however are “It is my belief that one constant lessons that can be learnt if history is anything to go by. in the stock market is human Firstly, sentiment plays a huge role in driving markets, and social media buzz nature.“ – Michael Burry cannot be ignored.
Michael Burry, the well-known investor who predicted the Global Financial Crisis of 2008, once said: "It is my belief that one constant in the stock market is human nature." Mired in all the facts and figures in the world of the stock market, we tend to forget that the market is first and foremost, comprised of humans. Human sentiment plays a huge role in driving markets and will continue to do so, and this incident serves as a reminder to us of this.
In a world where information exchange is readily available with a literal tap of the finger and where social media has become such an integral part of our lives, we simply cannot afford to ignore the impact that these factors can have in shaping our emotions and influencing the decisions we make. As we remain deeply entrenched in the world of social media and continuously seek new ways to be closer to each other digitally, the impact of sentiment on the stock market will more likely than not, become more pronounced.
Secondly, leverage and (retail) options trading will continue to exist and be a part of Source: CNA this new regime of trading that we must live with.
Leverage and financial derivatives like options bestow upon the retail trader the ability to control an outsized dollar amount of shares with a comparatively trivial amount of capital. As the gamification of retail trading continues to attract more and more retail investors, data compiled by CNBC shows that the utilization of leverage and the ubiquity of trading financial derivatives continues to soar with no signs of abating.10
By combining the power of mass-coordination made possible by social media, the driving force of sentiment and the exponential efficiency that leverage provides, retail traders involved in this GameStop saga were able to achieve in hours and days what it took those involved in the Volkswagen short squeeze years to implement.3,12 These two factors were present both times for GameStop, once in January, and again in end-February. Beyond looking at GameStop, certain other retail favourite “meme stocks” too have exhibited similar behaviours and market dynamics.11
The winds of change are clear. The hedge funds are taking note – keeping close tabs on social media sentiment, paring their risk to options closer to expiry dates, and even hiring Redditors to scour the forums for new trading ideas.11 The retail trader ought to take note as well.
Page 3 of 4 REFERENCES
1. Sources referred to includes mainstream media coverage from reputable news outlets such as Bloomberg, Reuters, CNBC amongst others. 2. Bill Bostock, "Wall Street Bets, the Reddit forum that coordinated the massive surge in GameStop's stock, is defiant even as the price crashes," Business Insider, February 3, 2021. 3. George Calhoun, "GameStop, The Second Surge: Anatomy Of A ‘Gamma Swarm’," Forbes, March 10, 2021. 4. Andrew Griffin, "GameStop: Did Cryptic Ice Cream Cone Tweet Start New Stock Price Frenzy?," The Independent, February 26, 2021. 5. John J Edwards III, "GameStop Soars With Activist Ryan Cohen Gaining Board Seats,“ Bloomberg, January 11, 2021. 6. Amelia Lucas, "GameStop takes its first steps in anticipated e-commerce shift, sparking a fresh rally; shares surge 35%," CNBC, March 8, 2021. 7. Clare Duffy, "GameStop CFO resigns a month after the Reddit trading frenzy," CNN Business, February 25, 2021. 8. Olga Kharif, "Top GameStop Investor Wants to Turn Retailer Into Amazon Rival,“ Bloomberg, September 22, 2020. 9. Bloomberg L.P., "Stock Price graphs and statistics for GameStop Corp. 1/1/21 to 10/3/21," Bloomberg, March 10, 2021. 10. Bob Pisani, "Pandemic-induced options trading craze shows no signs of slowing down," CNBC, Dec 4, 2020. 11. Matt Egan, "Wall Street is keeping very close tabs on WallStreetBets. Here's how," CNN Business, February 3, 2021. 12. Jamie Powell, "The day Volkswagen briefly conquered the world," Financial Times, October 31, 2018.
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