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GameStop Could Still Fall, Even if Stocks Overall Stay Steady

In my earlier coverage of GameStop (NYSE:GME), I’ve focused on the meme stock’s downside risk if and when the overall stock market corrects. Some may take this to mean that, as stocks remain strong, GME stock could see a pop or two before the music finally stops.

GME stock
Source: Shutterstock / mundissima

Could this happen? Possibly, but I wouldn’t count on it. Market resiliency alone won’t enable one last spike. It may not even hold steady until the bottom falls out. Instead, the stock could drift lower, until its seemingly inevitable capitulation occurs.

Why? Two factors. First, there may be a new name that means the “meme stock” legend category is about to get crowded. Second, GameStop has little else in play to excite investors. As fewer new investors hop in, but plenty cash out, it’s going to be tough for shares not to fall slowly toward lower prices.

Sure, a slight price decline sounds better than a sudden price collapse, yet with slight losses still a discouraging prospect, it’s best to take a hard pass here if you don’t own it. If you own it? Taking profit is the way to go.

GME Stock Could Face a New Meme Challenger

GameStop, along with AMC Entertainment (NYSE:AMC), have long been the top dogs among the scores of meme stocks that have made wild moves in 2021. Many names have tried to join them in holding “meme stock legend” status. For instance, Clover Health (NASDAQ:CLOV) and ContextLogic (NASDAQ:WISH), as seen during the summer’s second meme stock wave.

But despite the potential to get short-squeezed, ala’ AMC stock and GME stock, that didn’t quite happen. Both CLOV and WISH have since retreated to past prices. However, the latest meme name to hit the block, Digital World Acquisition Corp (NASDAQ:DWAC), may have such potential.

As InvestorPlace’s Samuel O’Brient reported last week, this SPAC (special purpose acquisition) became the latest “to the moon” play, on news of it making a deal to take former President Donald Trump’s Trump Media & Technology Group, the owner of his social media platform, Truth Social, public. Since the SPAC merger announcement, it’s up nearly ten-fold.

Hedge funds that held it are starting to cash out. But retail investors? They could still send it higher and keep it there. Not only because there may be a large pool of Trump fans who are buying the stock in support of him. Even those indifferent or negative in their view of him may find it to be a fast money opportunity worth chasing.

So, what does this have to do with GameStop? A more crowded field of “meme stock legends” has already put pressure on it. Combined with a lack of needle-moving news, further declines may be in store.

Lack of Game-Changing News Could Also Put Pressure

Besides the possibility of the “meme stock legend” camp getting more crowded, there’s something else that could result in more outflows than inflows with GME stock. That would be a lack of game-changing developments.

What do I mean? At current prices (around $177 per share), the e-commerce transformation catalyst is still more than priced-in. To soar again, it needs something else divorced from its fundamentals. For example, another short-squeeze, or perhaps something like inclusion in a stock market index such as the S&P 500 index.

Unfortunately, don’t count on either one of these happening. Short interest month-over-month has held steady, at around 7.8 million shares (16.8% of outstanding float). Yet as new traders show little interest in jumping in? I don’t picture the short side in this name scrambling to cover anytime soon.

As for something like S&P 500 inclusion? I wouldn’t count on that either. Given how it posted a loss last quarter, it may be awhile before it meets the earnings criteria for inclusion in the gauge.

Without the short-squeeze and index inclusion catalysts, and with traders having more opportunity riding the DWAC wave (or possibly an AMC stock rebound) than with going long GME stock at today’s prices? Expect more outflows than inflows into this name, and a continued drift lower.

Bottom Line on GME Stock

It may not be until if/when factors like inflation, monetary policy changes, and a possible economic slowdown knocks equities overall that the big drop happens for GME stock.

But as new “hot” meme plays hit the scene, and lacking much in the form of developments to drive traders back into it? The pullback it’s been on in recent days could carry on.

Still at risk of big capitulation, with little hope of experiencing even one last spike, your best move remains the same: steer clear of GME stock.

On the date of publication, Thomas Niel 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.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

Article printed from InvestorPlace Media, https://investorplace.com/2021/10/gme-stock-could-still-fall-even-if-stocks-overall-stay-steady/.

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