Stock Market

Despite the Fed’s Warning, Gamestop’s Party Won’t Stop

Just a year ago, Gamestop (NYSE:GME) was widely considered nothing more than an old-school, brick-and-mortar video-game retailer. As a result, there was not much interest in GME stock.

Yet there was a groundswell of support for Gamestop which was growing quietly, on an Internet forum known as Reddit. A sub-forum on that site, r/WallStreetBets, was preparing to wage war against powerful, short-selling funds.

It was, and still is, an epic David-versus-Goliath story. The shorts got squeezed like a lemon, and GME stock soared to breathtaking heights.

That should be the end of the story, right? Well, it’s not as simple as a storybook tale. A top-level financial regulator recently had something to say about Gamestop, and the statement could impact many other companies and stocks as well.

A Closer Look at GME Stock

It seems like ages ago now. Back in early 2020, there were reports circulating about a novel coronavirus going around; most people weren’t even calling it Covid-19 or a pandemic yet.

The entire stock market was starting to melt down, and GME stock fell briefly below $4. As it turned out, that would have been a great time to sell all of your worldly possessions and buy as many shares of Gamestop as possible.

At the very least, we should give Reddit credit for spearheading the whole meme-stock phenomenon. For once, the retail traders beat the hedge funds at their own game.

Thus, in late February of 2020, short sellers who bet against GME stock lost $1.9 billion in two days. By late May of that year, those shorting Gamestop had  sustained a staggering $6.7 billion of losses in 2021.

Fast-forward to mid-November  2021, and the share price is hovering near $200. GME stock defies technical analysis, just as the Reddit users defy traditional investment principles. The stock goes wherever it wants to, so predicting its  path is neither possible nor relevant.

What the Fed Said

It makes perfect sense that regulators would oppose the meme-stock phenomenon. r/WallStreetBets’ supporters view themselves as a community, while regulators likely see them as uncontrollable or even outlaws.

So you can probably guess how the U.S. Federal Reserve feels about the meme-stock movement. Obviously, the central bank  isn’t a big fan of the Reddit crowd. Still, I never imagined that the nation’s central bank would issue a report mentioning Gamestop by name.

First, the Fed referenced the price jump that took place in GME stock, which coincided with an increase in trading volume as well as share-price volatility. The Fed then suggested that the meme-stock phenomenon has undesirable consequences:

“Coincident with the dramatically higher price volatility, intraday trading flows for meme stocks became much more correlated… Higher flow correlations have the potential to amplify liquidity shortages in equity markets and may lead to price dislocations if sufficiently large.”

Don’t Fight It, Fed

Some folks might claim that institutional investors have created “price dislocations” for years and gotten away with it. One could also contend that the Federal Reserve has “dislocated” bond yields to the downside and stock prices to the upside for over a decade.

Next we get to what’s really bothering the Fed: “Second, episodes of heightened risk appetite may continue to evolve with the interaction between social media and retail investors and may be difficult to predict.”

In response to that, I’ll twist an old saying. Instead of “Don’t fight the Fed,” I’ll say, “Don’t fight it, Fed.” There’s no stopping the meme-stock revolution. There are many more retail traders than hedge funds, and it’s the retail traders’ right to interact and coordinate with each other on social media.

The Fed’s third argument is that the “risk-management systems of the relevant financial institutions may not be calibrated for the increased volatility or financial losses.” It shouldn’t come as a surprise that the Federal Reserve is concerned about protecting wealthy institutions.

It would be refreshing, in this instance, to see regulators guarding the freedoms of retail traders, who should be able to coordinate their trading on social media .

The Bottom Line

Hopefully, GME stock traders will continue to prevail against the powerful entities that oppose the revolution. So despite the pushback from from big-money interests, don’t be afraid to stand up for your rights.

The revolution is here, and it’s well under way. After transforming from a video-game retailer to an emblem of financial freedom, Gamestop will continue to change the game.

On the date of publication, David Moadel 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 Publishing Guidelines.