Thanks to its stunningly meteoric rise, GameStop (NYSE:GME) has transitioned from a strip mall afterthought to a 24/7 discussion, ranging from the trading tactics of attempting to spark short squeezes to broader issues about high-level power plays and seemingly glaring corruption. I just happened to draw the short end of the stick this time with GME stock, as I don’t have the benefit of knowing the results of its fiscal fourth-quarter earnings report.
It’s a shame because as you know, this will be the first fiscal disclosure since GameStop became a worldwide phenomenon. And what a turnaround it has been. One year ago, GME stock was trading at under $4. By Jan. 27, 2021, shares closed at $347.51, almost a 100X gain.
After losing longtime shareholders money, GME turned some lucky (and ridiculously intrepid) souls into millionaires.
Naturally, I’m curious what management will say. Heading into the report, the company enjoyed a market capitalization of $13.6 billion. Obviously, this is a much higher tally than what the valuation was a year ago. Now, GameStop must do everything it can to assure everyone that GME stock at roughly $200 a buy is a great investment.
Fundamentally, some encouraging catalysts exist, such as improved foot traffic. According to data from Placer.ai, weekly visits were down 3.9% for the week started March 8. This is a significant improvement from the week started Feb. 15, when foot traffic was down 26%.
Still, it begs the question: are Reddit traders and those on other social media platforms paying attention to the fundamentals of GME stock? From what I can understand, these folks want to give short traders a lesson in anatomy – a very unpleasant lesson without emollients I’m sure.
So, who’s going to win? Irrespective of what happens, here are my thoughts about where GME is headed.
Watch the Retracements for GME Stock
In a discussion about shopping mall operator Tanger Factory Outlet Centers (NYSE:SKT), I noted that SKT had similar characteristics to GME stock. Both are popular topics on social media and both feature the same crazy talk about doing to shorts what would amount to criminal acts in any other context.
In that article, I mentioned the concept of the law of diminishing returns. For these two meme stocks, the “energy” required to push up shares to generate prior levels of robust returns increases, while the returns themselves decrease in magnitude.
It relates to the law of small and large numbers. When GME stock jumped from $4 to $40, that of course is a 10X gain. But to get that same magnitude of profitability today, shares would need to be priced at nearly $2,000. Anything could happen but it’s highly unlikely.
Also in that discussion was the concept of Fibonacci retracement levels. Based on the peak closing high of $347.51, the 78.6% retracement level is found at $273.14. Interestingly, in the second Reddit-fueled rally that started in late February, GME stock peaked (so far) at just under the 78.6% retracement. Efforts to break above this resistance level saw shares drop just below the 61.8% retracement.
My theory is that unless something crazy happens, GME stock will continue falling, first toward the 38.2% retracement level, then to the 23.6% retracement. For me, the latter is the real test. If shares can hold $82, GameStop may be able to build something from there. If not, it could get ugly.
Frankly, I believe there’s a higher probability that things could get ugly. I don’t take any pleasure in saying this – I was one of the early supporters of GME before it went bonkers. But with so much speculation built into the stock, I believe shares have disassociated from reality.
Don’t Dismiss the Power of the Internet
At the same time, I’m just talking about what I perceive to be the probabilities of this narrative. By no means am I suggesting my viewpoint is guaranteed to occur. After witnessing high-profile hedge funds receive that anatomy lesson I referenced earlier, I’m in no mood to challenge the power of the internet.
Therefore, I’m not really sure what else I can offer you besides laying out the law of diminishing returns and the technical levels to watch out for. I will say that the second rally appears much more labored than the first, which was a near-vertical moonshot.
Could the bulls be tiring? That would be bad news if that turns out to be the case.
As for me, I thinned out my long position and straddled it with a short position (please don’t murder me – it’s not worth it). I respect the power of the internet but I also know that the law of diminishing returns is a law for a reason.
On the date of publication, Josh Enomoto held a straddled position in GME.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.