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Diminishing Returns: GameStop and AMC Stock Pop and Fizzle Again

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It’s the story that just won’t die. Meme-stock guru Keith Gill, also known as “Roaring Kitty,” posted on social media again, and the short-squeeze mob sat up in their chairs. However, it looks like each new price pump has less power and shorter duration.

There’s no denying that the story behind the 2021 short-squeeze rally of AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) stock was compelling, if not really investable. For a hot minute, it felt like retail traders might finally get the upper hand against well-heeled short sellers.

In hindsight, everyone can now see that bandwagon-jumping retail traders will only end up holding the bag with GME and AMC stocks. However, some investors may be wondering whether this year’s meme-stock revival will have a happier ending.

Just bear in mind the famous last words of innumerable unsuccessful traders and investors: “This time, it’s different.”

Another week, another pump

To recap, Gill re-emerged on social media in mid-May after a long hiatus. His X posting was cryptic, containing just a drawing and no text:

Apparently, it was sufficient to prompt a massive short squeeze in GameStop, AMC Entertainment and a handful of other meme kings of 2021. However, actually profiting from that share-price pump required luck on the order of a lottery-ticket winner as those meme stocks tumbled several days after rocketing higher.

Except for a few false starts here and there, the meme-stock scene remained drama free after the mid-May pump. However, like Jason in the Friday the 13th movies, Gill just never seems to disappear permanently.

Again, this X posting from “Roaring Kitty” on June 2 is cryptic as it only displays a picture and no text. This time, it was a reverse card from the Uno card game.

Around the same time, Gill posted a screenshot on Reddit that appeared to display his GME stock and option holdings. Here’s another X user’s reposting of that image, shown as a reply to Gill’s posting:

I have no way to verify whether Gill actually held 5 million GameStop stock shares and 120,000 GME call options or whether he really gained $2.65 million in a single day from his position in GameStop stock. If so, one can only wonder what point “Roaring Kitty” was trying to make.

The rise and the inevitable fall

Almost certainly as a result of Gill’s second re-emergence on social media, GME stock rallied 78.6% in premarket trading on June 3. Meanwhile, AMC stock was up 23.3% in the premarket hours.

Those stocks certainly didn’t turn red that day, but they did close substantially lower than where they opened. On June 4, GME and AMC stocks started with weak rallies and then completely fizzled out.

Thus, it appears that meme stocks are delivering diminishing returns for eager short-squeeze traders. The mid-May rally lasted longer and moved much higher, and it gained much more traction in the financial media.

The story is even worse for some lesser-known meme stocks. A textbook example is Faraday Future Intelligent Electric (NASDAQ:FFIE) stock, which is lower in price and trading volume than GameStop and AMC Entertainment stocks.

Consequently, FFIE stock may be more susceptible to steep, uncontrolled declines. Indeed, FFIE stock got caught up in the most recent meme-stock rally, but it absolutely collapsed on Tuesday.

Faraday Future Intelligent Electric is an electric-vehicle (EV) company, by the way. It issued a “going concern” warning not long ago, although fundamentals and financials aren’t a high priority when meme kings peddle get-rich-quick schemes to amateur traders.

It may be futile to warn some investors about meme stocks, but one can’t blame Tradier CEO Dan Raju for trying.

“What happens in meme rallies like the one we are seeing with GameStop is that baseless speculation is misunderstood as strategy by a few segments of retail investors,” Raju explained to MarketWatch.

In a similar vein, Interactive Brokers Chief Markets Strategist Steve Sosnick took a cautionary tone regarding these short-squeeze targets.

“If you’re chasing this stock up here, you’re more likely than not the source of liquidity for whoever’s controlling this account to sell into your enthusiasm. They’re stoking the enthusiasm to get ordinary people to buy,” Sosnick was quoted as saying in a Yahoo! Finance report.

Nonetheless, chasers will chase, and “Roaring Kitty” will continue to roar as long as people will listen. Thus, the meme-stock trade will almost certainly continue for a while longer, even if the returns from that strategy are diminishing into nonexistence.