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AMC Stock Took A Critical Hit. Will It Bounce Back?

AMC stock broke resistance at the $20 level and has sunk more than 40% in 2022 alone. Is a recovery still possible?

As fear has set in in U.S. markets over macroeconomic uncertainties, even meme stocks are feeling the pain. AMC shareholders have accumulated 40% losses in 2022 alone.

It looks like short sellers winning the war, at least for now, but is it possible that AMC stock could bounce back and rally toward the moon once again?

Figure 1: AMC Stock Took A Critical Hit. Will It Bounce Back?

Figure 1: AMC Stock Took A Critical Hit. Will It Bounce Back?

(Read more from Wall Street Memes: Jim Cramer On GameStop And AMC Stock: "Buy What You Know")

What does AMC “meme history” say?

The nearly year-long history of AMC’s trading as a meme stock has presented several periods of extreme volatility. Between late January and mid-February last year, for example, AMC fell 72% but then rallied over 130% through March.

From its historic high in June of last year through to early August, AMC fell more than 50%, and then in mid-August it started trending quickly upward once again.

The last sharp freefall took place from November of last year to mid-December of last year, when AMC shares plunged 48%. Unlike with previous big drawdowns, AMC failed to rebound after this slump; instead, it eventually dropped another 35% to its current level.

For the first time since last February, AMC has experienced a drawdown of more than 72%, - the stock is 74% below its all-time highs reached last June, at last check.

Figure 2: Drawdowns in AMC stock in the past 12 months.

Figure 2: Drawdowns in AMC stock in the past 12 months.

But those betting against AMC shouldn't get too comfortable. Indeed, AMC stock has shown throughout its recent “meme history” that it has the capacity to recover from extended losses and undergo sharp, bullish turnarounds.

Short interest is still high and should continue to increase

The greater the gain in an asset, the greater the FOMO (fear of missing out) that asset produces. This psychological phenomenon applies to both buyers and sellers. For short sellers, betting against AMC on the premise that its meme momentum has weakened and that the stock should return to trade according to its fundamentals has helped generate an increased short interest.

As of the last date for which data is available (December 30, 2021), according to Yahoo Finance, 18.5% of AMC's total float was shorted. Given AMC's weak performance during the first month of 2022, it’s a solid bet that the current short float is even higher.

With short interest numbers remaining high and probably growing, there’s lots of fuel for a potential short squeeze ahead. But it is worth remembering that for this to occur, a massive increase in buying pressure will be needed, otherwise, gains will only be short-term.

Some strong FUD

Panic has gripped speculative assets recently. From growth stocks to cryptocurrencies, investors have turned bearish, as macroeconomic uncertainty has left them uneasy about the direction of the US economy.

Market jitters have been clearly reflected in the VIX, also known as “the fear index.” After holding below 20 in Q2 and Q3 of last year, the VIX spiked around 80% in the first few weeks of 2022 alone. When the VIX rises considerably, stock prices tend to correct as the market takes cover.

Figure 3: VIX performance in a 1-month period.

Figure 3: VIX performance in a 1-month period.

Here, AMC is affected just as the broad market is. Fear influences individual investors’ sentiment, which has largely been the engine for AMC’s price movement. A more cautious attitude means many investors will be discouraged from taking on “riskier” bets on speculative assets like meme stocks. Those that have seen gains in these assets may move to cash out their positions, too.

But as history shows, fear does not last forever. Just as there is no eternal uptrend, there is no such thing as a perpetual downtrend. AMC has already managed to reverse several significant drawdowns. But now it faces yet another challenge: to show resilience during a scenario of greater economic instability. 

(Read more from Wall Street Memes: Nokia Stock: Could The Meme Saga Repeat In 2022?)

(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)