Too-Volatile, Too-Disconnected GameStop Stock Will Continue to Burn Shorts

I’ll be the first commentator to admit that video-game retailer GameStop (NYSE:GME) isn’t making money hand over fist. Yet, this admission doesn’t mean that betting against GME stock is a good idea.

A few months ago, I even flipped bullish on GameStop. At that time, I dared adventurous traders to consider a long position.

Photo of the Gamestop (GME) logo On a Mobile Phone.
Source: Shutterstock / mundissima

Of course, this isn’t to say that anybody should pour their entire account into GME stock. It’s too volatile for a very large-size position and the stock’s price is too disconnected from the company’s fundamentals.

So maybe, my stance is best described as resignation rather than optimism. And with that, please join me as I hold my nose and analyze the name that kicked off the meme-stock game.

Looking for the Next GME Stock

Looking back upon a bizarre first half of 2021, it’s interesting to revisit the wild price moves of GME stock.

Everyone and his uncle wants to find the next GameStop, but there’s really nothing like the original. I mean, the price move in this stock was legendary.

And, it set up a target for the bulls. When GME stock touched $483 in January, investors’ accounts lit up bright green while short sellers awaited calls from their brokers’ margin desks.

It was the best of times and the worst of times, depending on which side of the trade you happened to be.

The short sellers have attempted to fight back, but the GameStop stalwarts seem to have endless energy.

For an immediate-term target, the bulls can look back to the GME stock price spikes in March and June. Those times, $300 provided a hard resistance point.

Breaking through that with heavy, sustained volume would set $500 as the level to watch. The bulls almost got there in January — and after all, resistance levels are meant to be taken out.

Short Attention Span

The folks on Reddit and other social media outlets who like to trade and talk stocks sometimes aren’t taken seriously by the financial press.

That’s a shame, and it’s unfair. Big-money short sellers have pushed stocks in their desired direction for years, so why can’t retail traders band together and take on the institutional “whales”?

It’s a fascinating debate that involves a David-versus-Goliath battle which continues to this day. But who’s the winner here, really?

You’d be hard-pressed to consider GameStop, the company at the center of all this, the big winner.

GameStop’s first-quarter financial results point to an operating loss of $40.8 million and adjusted EBITDA of a negative $0.7 million. Clearly, the company is still struggling financially.

Thus, the retail crowd’s focus is more on the stock than the company itself.

Surprisingly, though, they’ve kept their attention on GameStop even while focusing on a multitude of other names.

A Rule of Thumb

For not tossing GME stock out like yesterday’s trash, I’ll give the meme-sters respect.

Furthermore, they haven’t capitulated in the ongoing battle against the short sellers, who undoubtedly control billions of dollars in cash and assets.

If you’d like to join the grassroots resistance movement against the short sellers, then you’ll want to consider your strategy carefully.

Small position sizing is rule number one, always. Yet, there’s another guideline to consider.

Anything above 15% short interest (as measured by short volume ratio) is a good rule of thumb for considering a short squeeze target, in my opinion.

As of July 21, GME stock’s short volume ratio was 24.3%, so this could be a springboard for an epic squeeze.

With that, the $300 target and even the $500 level could be taken out quickly.

The Bottom Line on GME Stock

We can view this as a battle of the haves versus the have-nots, or simply as a potentially profitable trading opportunity.

Either way, there could be another major price move coming in GME stock.

And at the end of the day, there’s no point in judging the meme stock traders. Instead, you might consider joining them and possibly booking some nice profits.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


Article printed from InvestorPlace Media, https://investorplace.com/2021/07/short-sellers-will-continue-to-get-burned-with-gme-stock/.

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