AMC Entertainment (NYSE:AMC) stock may have begun its final descent.
If the market gods are real, they certainly have a twisted sense of humor. At the beginning of this year, Wall Street was forced to recognize a new phenomenon: meme trading.
In this case, AMC, which appeared on the verge of catastrophe, suddenly found new life and then some. Remember, AMC stock was trading for a little over $2 in December 2020
Of course, when we talk about meme stocks, we can’t forget the name that started it all, GameStop (NYSE:GME). For full disclosure, I own both these shares. With GME, I took a position before the madness in June 2020, hypothesizing that economic pressure will help lift shares due to American consumers seeking the respite of cheap entertainment.
In the strangest of paradoxes, I couldn’t be more wrong and yet more right. Apparently, deadly pandemics that kill millions of people across the globe are helpful for consumers. Yet despite my incorrect hypothesis, GME soared to unbelievable heights.
If I remember correctly, cheap entertainment and the irreplicable nature of person-to-person social interactions were central to my picking up AMC stock years ago. That too was a wrong move. But thanks to the paradox of memification, I got out of a bad trade and took some profits.
Now, I’m playing with house money. Whatever happens to either GME or AMC stock, I’m in the black. Unfortunately, the same cannot be said about those who entered into these names at elevated prices.
As the Wall Street Journal explained, a blood bath occurred during the Dec. 13 session, resulting in sizable double-digit losses. GME took a 14% hit, while AMC stock went a bit greater, down 15% on Monday.
While omicron and inflation fears weighed heavily, there’s something else in the air.
The Paradox Finally Bites AMC Stock
Back when Abraham Lincoln was running for the U.S. Senate, he declared in part before the Republican State Convention that a “house divided against itself cannot stand.”
Of course, Lincoln took this wise and insightful phrase from a person — the person — whom many Christians say is the “reason for the season.”
Now, let me be clear. Lincoln had higher stakes than talking about something like AMC stock. “I believe this government cannot endure, permanently half slave and half free,” he rightfully admonished. Nevertheless, the concept of paradoxical ideologies appears to finally be biting AMC in the posterior.
You’ll recall that meme traders initially followed a moral code: prevent short traders from essentially bankrupting businesses for which millennials have fond childhood memories. Indeed, nostalgia had been a rising market and the pandemic only accelerated this sentiment.
So yes, I understand why meme traders bid up AMC stock. AMC going under is like watching your child drown, an unimaginable thought.
But then — this is where the paradox comes in — it’s the young people and their love of streaming that accelerated the pain of AMC stock pre-pandemic in the first place!
And according to a recent report from Axios, “49% of pre-pandemic moviegoers are no longer hitting theaters.” Moreover, production companies “responded to this trend by making new films available online at the same time as in theaters.”
Here’s the thing — the age distribution of moviegoers demonstrates that millennials represented the largest demographic category in the pre-pandemic years. Therefore, if anyone can turn the ship around, it’s millennials.
So this data that Axios is reporting is problematic. It suggests that young people love AMC stock but don’t necessarily care for the underlying business.
Well, at some point, the fundamentals come a-knockin’.
The Ultimate Test Is Here
In my last write-up for AMC stock, I mentioned that the $35 level is crucial for the health of the security. At around $24.50 today, it’s going to need about a 50% move or so to recapture the technical demarcation line between bullishness and bearishness.
If AMC were a cryptocurrency, I might be a bit more optimistic about its chances. However, stocks cannot rise on sentiment alone but by every line that proceedeth out of quarterly earnings reports. Those earnings reports depend on fundamental factors like foot traffic.
In other words, the paradox can’t last indefinitely. Either you buy the stock because the business is good, or you sell the stock because the business is bad. You can’t mix and match this simple algebraic equation and expect that the contradiction will be permanently profitable.
On the date of publication, Josh Enomoto held a LONG position in AMC and GME. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
