GameStop soars 74% in a single day, can the MEME stock frenzy return to 2021?

Intelligent Finance APP noticed that without any fundamental news, the stock price of GameStop (GME.US) more than doubled. Short sellers were squeezed, and retail traders used same-day options to amplify the gains of the previously hard-hit stocks.

The surge in GameStop on Monday evoked memories of early 2021, when the frenzy of MEME stocks captured the public's imagination, and day traders caused inexplicable wild fluctuations in stock prices. However, upon closer inspection of the scale and frenzy at that time, it is clear that the latest MEME stocks are far from the original MEME stock frenzy.

In the first round of skyrocketing three years ago, GameStop's stock price soared over 1000% in a few days, as retail traders on Reddit's Wall Street Bets forum fought back against Wall Street giants shorting the stock. Today, most of the "Reddit raiders" who once had ample time and funds from the stimulus measures and employment policies during the peak of the pandemic have returned to work, bearing the burden of higher interest rates. Some entered the market late, and even in the recent rally, they are still incurring losses.

Furthermore, traders eager for gambling now have plenty of betting options. Due to the COVID-19 pandemic, casinos and racetracks were closed, making the stock market the main game in town. Since then, gambling in the stock market has become mainstream, with anyone wanting to place a bet able to do so with a few clicks on their phone in any "game" they desire.

Professional short sellers have also largely abandoned targeting companies with relatively small market capitalization, fearing the power of social media could trigger a squeeze. While the trading volume of short-term options is still rising, it is far below the levels seen in 2021.

Peter Atwater, President of a financial insights company and adjunct professor at William & Mary University, said, "These are always fleeting, like a solar eclipse - they happen, then disappear for a long time, and then happen again." "But if you observe them, you will find they are always emotionally extreme."

Monday's buying was triggered by a post made by Keith Gill on X Sunday night. Gill, the idol of retail trading known as "Roaring Kitty," drove the initial frenzy before disappearing from social media in June 2021. In less than an hour, GameStop's market value increased by about $6 billion, as traders believed Gill's return to Twitter signaled a return to prosperity. Former MEME stock favorite AMC Entertainment (AMC.US) rose by over 80%. The newly listed Reddit surged by as much as 14%. In the cryptocurrency space, the Roaring Kitty token surged by over 4000%.

As trading entered the afternoon, most stocks saw significant pullbacks - GameStop closed up 74% - which quelled speculation about the start of another MEME stock frenzy. Here are some financial indicators that can explain the reasons: Options

In the past few weeks, the trading volume of options has rebounded, but it is completely different from the level in 2021. About 700,000 contracts changed hands on Monday, more than four times the average level of the past month. With significant changes in $30 and $34 contracts, call options led the way.

However, during the meme frenzy peak in 2021, there were millions of contracts traded in a single transaction. The most active day of that year was January 22nd, with a trading volume of 8.5 million contracts.

Mixed Orders

One driving factor of the 2021 frenzy was that most retail traders hadn't reached the game station, let alone higher prices. In January of that year, the game station was consistently the most popular stock on retail trading platforms for individual investors, with buy orders far exceeding sell orders.

On Monday, the situation was different. While the game station was the most traded stock on the Fidelity platform, sell orders were almost equal to buy orders. This indicates that retail investors are selling to each other, rather than being the sole driving force behind the stock's rise. Nevertheless, the game station is still far from its peak trading volume. The stock would need to more than triple from Monday's closing price to reach that high point.

Less Money Buying Stocks

When Roaring Kitty and current GameStop CEO Ryan Cohen started the meme craze, interest rates were near historic lows, and with the Federal Reserve and Congress injecting trillions of dollars in stimulus funds to support the U.S. economy in recession during the pandemic, the stock market and cryptocurrencies were soaring.

The previous legendary story of GameStop became the focus three years ago, and then the Federal Reserve began raising interest rates at the fastest pace in a generation starting in March 2022 to cool inflation. Now, the stock market and the economy are in a different place, and retail traders are seeing a reversal of fortune as high borrowing costs reduce their holdings in risky assets In addition, the credit card delinquency rate of small banks has reached the highest level in 30 years, while the credit card delinquency rate of large banks has reached the highest level in 10 years. This means that the liquidity of small investors may be low, and the end of the "stay-at-home" order indicates that the "YOLO" crowd has returned to work or school, no longer obsessed with trading applications.

MEME Cryptocurrency Frenzy

Cryptocurrencies without intrinsic value have also attracted a large amount of cash from retail investors. According to CoinGecko data, a token created at the end of January using the name, logo, and code of a gaming platform unrelated to GameStop surged by over 1400% on Monday, followed by a subsequent decline.

Based on the popularity of tokens on social media platforms, so-called meme coins are prone to sharp fluctuations. The trading price of these tokens is usually less than a cent, and as long as a few traders inject a small amount of cash, the quantity and price of the cryptocurrency will skyrocket.

Scars of 2021

The meme stock frenzy of 2021 disrupted the U.S. stock market and nurtured some Wall Street professionals, but after the bear market in 2022, this frenzy did not end well. Data compiled by JPMorgan in 2022 shows that the money earned by the YOLO crowd during the meme stock craze in 2021 has all been lost.

Therefore, although Monday's activities by the organization revived memories of the peak in 2021, it has not arrived yet. Estimates compiled by BI show that in the first quarter of 2021, retail trading orders for stocks and ETFs accounted for 24% of the total market trading volume. BI's data shows that, in comparison, this proportion was slightly higher at around 17% in the first quarter of 2024