After a meteoric rise last week, the video game store chain GameStop is having a rough tomorrow on Wall Street, where its stock has plummeted 72% since Monday.
Has the stock market saga of the start of the year, which saw amateur investors challenge hedge funds with billions of dollars in assets, already ended? What can we learn from this?
Why is GameStop falling?
-31% Monday, -60% Tuesday: the sudden decline in the title of GameStop (listed under the symbol GME) is commensurate with its incredible weekly surge of 400% between last Monday and Friday.
The title had then been pushed by an army of stock marketers, active in particular on the community site Reddit, which joined forces against the great funds having bet on a collapse of GameStop.
This dynamic clearly lost momentum at the start of the week.
This halt is partly explained by the liquidation of positions taken by investment funds, which had to buy back at high prices shares whose decline they had anticipated.
Quincy Krosby of Prudential Financial points out that at the end of last week, “we started to see in almost every sector of the market the shares of individual companies fall more sharply than the sector of which they are a part. “
“This was the consequence of forced sales by hedge funds. They had to sell everything they could to cover their bets on the downside ”and buy back shares like GameStop, adds the expert.
Once these liquidations were finalized, demand for these securities naturally slowed down, weighing on its price.
Other factors may also have come into play, such as the fear of intervention by the American stock market policeman, the SEC, in the face of extreme market volatility or the limits imposed on transactions by certain brokerage platforms, which had already harmed GameStop. Thursday.
In the wake of GameStop, other stocks that were the subject of a speculative frenzy sank on Tuesday, in particular that of the AMC cinemas (-41%) or of the department store chain Bed, Bath & Beyond (- 16%).
The price of silver, which had reached an eight-year high on Monday after also benefiting from the interest of budding investors, was down 8%.
What role for individual investors?
If the GameStop page is about to be turned, the role of small investors on the stock market is more than ever in the foreground.
The pandemic and the containment measures had already contributed to explode the number of Sunday investors, private sports betting and followers of brokerage applications like Robinhood.
Sometimes described as a community of “millenials”, lulled by social networks and new technologies, this group is however far from homogeneous, recalls Mr.me Krosby.
“Individual investors aren’t just angry 25-year-olds. Experienced professionals have also entered the fray ”to take advantage of the increase, says the expert.
Professional or not, these investors have been able to exploit loopholes in the market to trap hedge funds at their own game.
Some high finance players nevertheless believe that this strategy is doomed to failure in the longer term.
“The victims of the GameStop experience are and will continue to be the Robinhood users who have invaded the financial markets (…) by having neither the size, nor the detailed plan, nor the mathematical expertise in the quotation options for success, ”said investor and fund manager Bill Gross.
A risk of a financial bubble?
The wind of panic that blew on Wall Street last week has also revived discussions around the possible bursting of a financial bubble.
Many observers have indeed considered the stock market overvalued for many months, with the health of many companies on Wall Street not reflecting their actual performance.
The Federal Reserve’s accommodative policy (low interest rates, asset buybacks), which flooded the markets with liquidity, and the US government’s stimulus measures allowed a substantial amount of money to circulate on the stock market, thus creating an imbalance .
The measures of the American Central Bank (Fed) are intended to support the economy, slowed by the recession, and to encourage investment. But a change of course by the Fed could prove fatal.
“For most specialists, a bubble bursts when the market believes that the Fed is about to become more restrictive,” explains Mme Krosby.
In that regard, GameStop fever could be a harbinger of a deeper movement.