In 2021, it took nine months for the GameStop trading frenzy to subside and regulators to understand this incredible move. Recently, meme stock favorite GameStop (NYSE:GME) surged 490% in eight days, then proceeded to decline. On Monday, shares opened at $40.19 per share, nearly double the prior close, but ended the day around the $28 level, driven by social media posts linked to meme star champion Keith Gill.

Keith Gill, initially admired for his authentic investment thesis and significant personal stake, has faced regulatory scrutiny in the past. His recent meme posts, tied to large positions taken in GameStop, could have him headed for another hearing soon.

Regardless of what happens to Mr. Gill and whether he’s destined for a billion-dollar net worth, it’s likely also true that most retail traders aren’t likely to profit from this move. Here’s why the recent rally for meme stocks may be one to avoid right now.

Disappointed Market

Those reversals illustrate how options professionals now use strategies to dissipate the impact of social media-driven trading while regulators quickly address unusual activity. Now, models have been updated, and options dealers raise premiums on call options during volatile spikes, requiring significant stock movements for profitability.

Experts have noted that retail traders buying high-priced call options rarely profit. Following Monday’s spike, options prices are set to rise. Additionally, dynamic hedging by institutional traders effectively bets against sustained volatility, a strategy that typically proves accurate.

The so-called Consolidated Audit Trail (CAT) system enables the agency to first determine what happened, according to some experts. This system then checks for misleading statements in social forums aimed at pump-and-dump schemes. Evidence from the CAT can justify opening an investigation or bringing civil charges if trades contradict public statements.

Both the SEC and NYSE declined to comment on investigating recent GameStop trading, and GameStop did not respond. However, some are equating this to a stress test for the CAT system.

Andrew Left, the founder of Citron Research, who suffered a 100% loss shorting GameStop during the 2021 squeeze, resumed shorting the meme stock. He initiated short positions this week after a surge in GameStop shares, fueled by cryptic posts by investor Keith Gill.

Left described it as a favorable opportunity but noted that his current short bets are smaller than those in 2021 when he covered the majority of the short at a loss.

Losing Money Big Time

In January 2021, the meme stock craze began before the Wall Street and SEC’s trade-tracking system, Consolidated Audit Trail, was complete. The SEC concluded in October 2021 that GameStop’s rise was due to retail enthusiasm, not a short squeeze, though a 2022 study led by Columbia Law professor Joshua Mitts suggested a squeeze.

By 2024, the CAT was operational, allowing the SEC to quickly identify whether independent traders or coordinated actions drive price movements.

Shares Going Downhill

Fewer traders joined the recent GameStop rally, suggesting those burned by the first meme stock surge learned their lesson. Daily trading volume for GME peaked at 368.8 million in February 2021 but only reached 96.08 million last week, a 74% decrease.

Despite the hype, GameStop remains fundamentally weak, with negative earnings in 9 of the past 11 quarters, net losses in 10 of the past 12 quarters, a drop in assets from $3.76 billion in Q3 2022 to $2.71 billion in Q4 2023, and a 60% rise in operating expenses from Q4 2023 to Q1 2024.

Analysts’ forecasts likely dampened enthusiasm for GameStop. The Wall Street Journal’s median price target is $7, and MarketWatch rates it a Strong Sell, indicating a 68.55% potential downside. Currently trading at $26.50, down from recent highs reaching $67.40, a $1,000 investment at the peak would now be worth less than $400.

On the date of publication, Chris MacDonald did not hold (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.