Interest in GameStop and AMC Theaters faded. Why not price?

Dear subscriber,

Mentions of the Reddit trades turned to whispers.

Maybe a news story pops up on CNBC during the lunch hour.

But the sizzle behind the GameStop mania faded.

So why hasn’t its share price?

Our TrackstarIQ data contains some key information that could help us shed light on the mystery.

And as we walk you through the analysis, we’ll point out why these stocks might actually rally from here.

Continual interest

Over the last two months, searches for GME and AMC fell from their peak. Yet, the current search levels remain well above normal.

Take a look at the following chart of financial site traffic from AMC and GME searches by institutional advisors.

Clearly, search volume dropped from some insane highs.

Yet, we’re still talking about volume that regularly exceeds 50,000-100,000 each day.

To give you some perspective, Apple (AAPL) ranges from 30,000 – 70,000. Keep in mind what Apple means to the markets compared to AMC or GameStop.

A potential run from here

To understand why shares could move higher from here, let’s take a step back to early January.

Step 1: High short floats

Both AMC and GameStop held exceptionally high short-floats.

You see, traders that want to bet against a stock borrow shares from their broker to sell them. As the stock drops, they turn a profit. Eventually, they buy back the shares at a lower price and pocket the difference.

For example, if I shorted GameStop shares at $20 and bought them back at $18, I would make $2 per share.

How many shares would you expect could be shorted at any point in time?

Most of us would say only the shares currently available to trade.

But that would be wrong.

Banks and brokers love to give traders rope to hang themselves.

So they let them borrow more shares than exist to short them.

That’s why GameStop had a short interest ratio of +130% back in January!

Effectively, 30% more shares of GameStop were sold short than existed.

Step 2: Squeeze the shorts

Anyone who sells a stock short loses money when shares go up in price. In theory, your losses could be infinite if the stock goes to…well, infinity.

At some point, when losses grow to a breaking point, the broker will institute a margin call.

A margin call means the broker said the trader needs to cut his losses right away before they get worse.

We saw this recently with Bill Hwang and Archegos Capital…just in the opposite direction.

To close out a short position, traders need to buy the share back. That sends shares higher, which in turn creates more margin calls. Eventually, you get a cascade of buying by funds forced to exit their positions.

That’s exactly what happened with GameStop and AMC.

Step 3: Wait for traders to short the stock again and repeat the process

Despite streets littered with Melvin Capital’s carcasses and others, some funds still want to short GameStop and AMC theaters.

Both still hold fairly high short floats, at +30% for GME and +13% for AMC. While they’re not nearly as massive as January, they’re some of the highest out there.

Takeaways

Both of these stocks create potential trading opportunities in the short-term. History says their fundamental values will eventually catch up with them.

And in an earlier article, we discussed how AMC measures up these days.

Don’t let the headlines sway your decisions. 

Know the difference between trading and investing. 

Make your decisions accordingly.

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