Why GameStop is surging and what it means for the stock market

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GameStop is among a handful of previously unloved companies whose shares are spiking in recent weeks. They’re being fueled by an unruly crowd of individual investors on chat forums like Reddit. Here’s what you need to know.

Why is GameStop up?

GameStop was languishing below $5 a share as recently as September, but it began to rally after Ryan Cohen, the entrepreneur founder of Chewy.com, took a stake, saying the struggling mall retailer was ripe for a turnaround. On Jan. 11, GameStop said it would add three new directors to its board.

That’s when the stock got supercharged. Individual investors — particularly on the Reddit chat forum “WallStreetBets” — began buying GameStop shares and encouraging others to do so. That caught the eye of Andrew Left of Citron Research, a short-selling guru who recommended in a Jan. 21 report that Wall Streeters bet against the stock. By Friday, GameStop had a short interest of 102 percent of its outstanding shares, making it one of the most shorted stocks on the market.

Left’s report sent Redditors into a rage. WallStreetBets — whose meme-obsessed, profanity-spewing members call themselves “degenerates” — erupted with violent threats against Left that scared him enough to report them to the FBI. Since then, GameStop stock has soared more than 800 percent, almost cratering a well-known hedge fund called Melvin Capital. Left said Wednesday he has exited his short bet against GameStop.

Why are BlackBerry, AMC Entertainment and Bed Bath & Beyond up, too?

It’s not just GameStop that’s surging but a whole group of companies, and with most of them there’s a common thread — they’ve been heavily shorted by big Wall Street firms. That makes their shares prone to spike on any good news, as investors who have shorted the stocks are forced to cover their positions by buying back the shares.

Earlier this week, AMC’s stock spiked after the company announced it would avoid bankruptcy with new financing. In normal times, the news wouldn’t have necessarily boosted the shares — the financing means AMC is going deeper into debt and will water down its existing shareholders. This time, it has been different.

“Remember when everyone on this [chat] was talking how this will be a war?” one user posted on Wednesday morning as shares in AMC soared more than 300 percent. “This is what we meant. Your friends will get shot down and you might lose an arm, but that’s what happens at war.”

Other stocks that are surging include tech firms like Blackberry, Plug Power and Nio, a Chinese electric-car maker. A few retailers also are getting pulled in. Bed Bath & Beyond was up 27 percent on Wednesday, while shares of the Fossil and Express chains were both up 93 percent.

Why are the gains so huge?

In addition to the above-mentioned short interest that makes these stocks prone to spike on good news, individual investors in recent weeks have been using options that are further enhancing the effect. Particularly popular on WallStreetBets are “call” options, which enable investors to buy stocks at a predetermined price in the future.

These options force so-called market makers — usually big financial firms — to buy more shares themselves in order to hedge their own exposure. A vicious cycle of buying can result.

Where is all of this headed?

Asked this week whether to keep buying GameStop stock at such lofty prices, a Reddit user responded, “You’re good until Friday.” That could indicate that the WallStreetBets crowd may some sort of plan in place.

Stock-trading platform TD Ameritrade on Wednesday moved to rein in the frenzy by limiting some trades of GameStop and AMC Entertainment. Indeed, some Wall Street pros are fretting that the rules of the game have been switched up. “It’s a bloodbath,” one hedge-fund trader told The Post. “The unwashed masses have figured out how to play the shorts and its f—-ing carnage.”

Users had rejoiced Tuesday evening when Tesla CEO Elon Musk tweeted “GameStonk,” an acknowledgment of a meme that they use to attack the stock. Likewise, the Winkelvoss twins have been firing off pro-squeeze tweets and claiming “The inmates are running the asylum.”

Nevertheless, most Wall Street experts say it’s only a matter of when, not if, these stocks return to earth. That’s because their stock prices are completely out of whack with the health of their businesses.

“I don’t know when it is going to end, but I don’t think it can continue much longer,” Eric Kuby, chief investment officer at North Star Investment Management in Chicago, told Reuters. “It’s so obviously irrational that it has got to end really badly, in my opinion.”

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