Some background first
Reddit forum discussions and coordinated trades have been rooted in the community’s disdain for so-called “toxic market participants”. These toxic players tend to be hedge funds and a few others on Wall Street who make sizable bearish bets against certain stocks through naked shorting.
This practice, considered illegal after the subprime crisis in 2008, consists of borrowing shares to sell short, but without these shares existing. This is only possible in the very short term and due to technical loopholes in trading, as transactions take days to clear the system.
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The power of meme mania
Through the efforts of the "apes" community, mass demand for stocks in which "toxic players" held naked short positions forces them to cover their losses. To do so, shorts must buy shares in a hurry to avoid regulatory issues and margin calls. The strategy has worked brilliantly for the apes.
Since the beginning of meme mania, shares of GameStop (GME) and AMC (AMC), the most relevant in the movement, have climbed by more than 1,000% and 2,000%, respectively. With the early success, meme mania gained strength as market interest in these stocks skyrocketed.
“Mother of all short squeezes”
Famed AMC trader Trey Collins said a couple of weeks ago, in an interview with CNBC, that he believes a new short squeeze in AMC stock would soon take form.
According to him, one of the main reasons is that traders who were betting against the shares had been holding their positions for nearly 50 days at an average entry price of $10. As the stock moves higher, buying pressures could mount and lead to a sizable short squeeze.
To be fair, since the interview aired, AMC shares have only moved sideways. Still, the short interest has remained elevated, at over 80 million shares – about 21% of the float. An uptick in the stock price could trigger the snow-ball effect that results in a bullish avalanche.
Among other reasons for the short squeeze, Trey also mentioned that FOMO (fear of missing out) could play a role and act as a catalyst for the next meme attack.
AMC to reap the benefits
As mentioned in a recent article, the hyper valuation of AMC shares could benefit the company, as it uses the higher share price to strengthen its fragile (but improving) balance sheet. As a reminder, AMC is in the early stages of recovery from the highly disruptive COVID-19 crisis.
Ultimately, AMC needs to see an improvement in the post-pandemic macroeconomic landscape to return to profitability and positive cash flow. But with meme mania supporting the movie theater operator now, the recovery could be less painful and drawn-out than anticipated.
David vs. Goliath
Meme mania has been working because its enablers have become increasingly united around their causes: to make money and, as trader Matt Kohrs has stated, to “stick it to Wall Street”. Fighting the toxic side of the market, it turns out, has been a very profitable idea.
It is likely that new short squeezes will pop up for as long as meme mania remains alive and well. For a stock like AMC, the other important question is whether or when the business fundamentals will matter, if or when the meme cycle loses steam – something that still seems far from happening.
Read more from Wall Street Memes: Why Index Rebalancing Can Be Good For AMC, Bad For GameStop Stock
Wall Street Memes has recently asked Twitter how far AMC could climb in the next month. Social media seems highly confident in a 250% spike – although some have been calling for a price target of $500 or more! See poll below.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)