The endgame may be near for the GameStop squeeze trade as enthusiasm and volume wanes
Peak GameStop?
GameStop's volume and volatility have been much lower this week than in the six previous days. This is also true of other heavily shorted names like Bed Bath and Beyond, Express and AMC.
What's going on?
Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group, ticked off the signs that the endgame may not be far off for GameStop: "More puts than calls have been trading recently. Open interest in call options is much lower. There's a decline in volatility. There's signs the Reddit flows are moving elsewhere, like silver. Those are definitely signs of peak GameStop."
GameStop shares are down 54% on Tuesday after losing 30% on Monday. The stock traded 37 million shares on Monday, down from a high of nearly 200 million on Jan. 22 and the lightest volume in seven days.
Just like the GameStop shorts they claim to have pushed out, many in the Reddit community have already made money and are out. Some are ideologically committed but staying long. Others are seeking new opportunities, but Dan Egan, managing director of behavioral finance and investing at Betterment, says it's getting more difficult to rally the troops.
"The human brain craves stimulus through change," he said on CNBC's "ETF Edge" podcast. "One of the real challenges to these sorts of things is that they need to keep the attention on themselves by doing greater and greater and more unusual things. And that's really hard. ... That sort of attention is getting fractured to other things that might have that possibility of going up. So you're looking at silver, other commodities, etc."
The problem, of course, is there is no investment committee — even the debate about silver has splintered into groups in favor and groups opposed.
And that's where the attention starts to unfocus, Egan said: "A lot of people think that this has been a sea change in how the market works, that as long as a message board or a community of people can focus attention on one specific stock, they can really move it around, it'll happen again. But it's going to be harder, because people are going to understand that it's a little bit of a mania, a Ponzi scheme thing. You need to get in at the right time and get out at the right time. ... And once you remove that ability to focus everybody on the same stock, the ability to push the price up goes down."
Does fractured attention mean that the Reddit community's impact will diminish, or can they rally around some new idea that excites a sufficiently large group to make an impact? Silver, assuming it was such a choice, may have been a very poor move.
Eric Balchunas, who covers ETFs for Bloomberg, noted in a tweet that the Silver ETF (SLV) had strong volume but underwhelming price action: "$SLV traded a little over $7b today (as predicted), a monster amount and 3rd overall, but shy of record and nowhere near $GME last week. It kinda ran out of steam in the second half of day..."
UBS' Art Cashin also noticed that the same fervor for GameStop was absent with silver: "Have we broken the back of the short squeeze? Not quite evident yet. If continuing selling in GameStop remains, it would indicate it was broken. So, the collaboration to squeeze the shorts broke down as they diverted their attention to sliver. Where I think they may not be successful at all."
The lack of leadership remains a critical problem, Egan said: "I think they have a few people that you consider leaders but aren't necessarily there to lead. They were accidental leaders. They're losing the sense of FOMO, the fear of missing out on something that's already sort of happened. That's a big driver of bubbles, is people wanting to not regret partaking in sort of a social event. So that's going down as well."
Finally, the intense attention the Reddit community has generated means that Wall Street is well aware of what they are doing, he added: "These message boards, for the most part, are public and their ability to bring in a lot of people and focus that attention depends upon them being public. But that also means that can be an analyst at a bank, and you can read these message boards just as much. So the ability to kind of surprise professionals has gone down dramatically now that this has happened once."
What's it all mean? For Murphy, it mean a likely return to the status quo ante: "The endgame is GME goes back to a more realistic level."
Note: Susquehanna Financial Group is a market maker in the securities of GME and SLV. SFG and/or its affiliates beneficially own 1% or more of the securities of GME.
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