GameStop shares skyrocketed more than 80% on Wednesday before pulling back in what is likely the largest short squeeze of 2021 so far.
What Happened: GameStop reported no major news on Wednesday, suggesting the massive rally in the stock was simply a textbook short squeeze.
Why It’s Important: On Monday, GameStop reported $1.77 billion in revenue over the nine-week holiday shopping season, up 3.1% from a year ago. Same-store sales were up 4.8%. GameStop said it benefited from a 309% jump in online sales compared with a year ago.
GameStop shares initially reacted positively to the holiday sales numbers earlier this week, but Wednesday’s rally appears to be more driven by technical market conditions than any news headlines or company fundamentals.
What is a Short Squeeze: A short squeeze occurs when a group of short sellers close (or “cover”) their short positions in a heavily-shorted stock all at once by buying back shares. The demand for shares from short-covering drives prices higher, often leading to more short covering.
As of late November, GameStop was one of the most aggressively shorted stocks in the market, according to S3 Partners analyst Ihor Dusaniwsky. At the time, S3 estimated GameStop’s short interest at around $986.1 million, or a whopping 145.8% of its float.
Perhaps many of these short sellers were betting on a weak holiday season for GameStop and are exiting their positions following Monday’s news.
The video game retailer also announced the recent addition of three new GameStop board members from activist investor RC Ventures. Baird analysts said the new board configuration could suggest the company is accelerating its digital transformation plan.
Alternatively, there could be something happening behind the scenes with GameStop that leaked out and has not yet been covered in the financial news media.
Benzinga’s Take: Whatever the reason, something appears to have triggered a massive short squeeze, and GameStop has plenty of shorts to squeeze.
Traders should be extremely careful trying to time the squeeze and any potential pullback. Short squeezes are notoriously volatile and unpredictable, even to some of the most experienced stock traders.
This story originally appeared on Benzinga.
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