Shares of GameStop Corp. (NYSE: GME) ended Thursday’s trading session at $108.73, up 18% on the day but down by roughly half compared to the $200 level it traded at on Wednesday. The extreme volatility prompted Fox Business’ Charlie Gasparino to caution investors against investing in a highly volatile stock, especially at a time when the volatility index was up around 80% on Thursday.
Redditors don’t understand stocks
Gasparino singled out a post on Reddit’s WallStreetBets that said “I will tattoo Wall Street Bets logo on my right buttcheek if we get GME to $1000.” Granted, this is one post and was most likely posted humorously and sarcastically.
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But it plays into the logic and thinking process that many Redditors share. The post has no information that justifies the upside case in GameStop’s stock. Specifically, it doesn’t make the case for the company to have great business prospects in its existing form. Nor does it suggest that a potential transition from a mall-based video game retailer to an online retailer will see success.
“It’s not saying any of that. It’s talking about’ if we get’. And I think that gets to the heart of the problem here.”
Also important to note, unlike GameStop’s surge earlier in the year, this time around the short interest is surprisingly little, Gasparino said. The short-selling community was “crushed” in prior weeks and while “no one is crying for them,” they are out of the stock and not looking to get back in.
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The same story playing out at AMC
AMC Entertainment Holdings Inc (NYSE: AMC) also heavily sold off after opening higher on Thursday. The movie theater chain was also a favorite among the Wall Street Bets community and gained on Wednesday. But shares closed Thursday in the red and investors who bought shares got burned by “playing with fire” by seeking out trading ideas on “message boards,” Gasparino said.
Smart money versus dumb money
The “smart money” always knows the time to exit a stock is before the “morons get in.”
“When the dumb money is in, usually the smart money is about poised to get out — they know when to get out,” he said.
Bottom line, investors looking to score a quick profit off the volatility need to be careful. After all, the original thesis of crushing the shorts no longer applies because the short sellers are fearful of large losses.