It’s happened at last … Retail traders have stormed the Wall Street fortress. The bigwigs are putting up a fight, but if you ask me, the cat’s out of the bag and it’s not going back in.
But I’m getting ahead of myself. A lot of people probably have a lot of questions right now…
- What the heck happened in the stock market this week?
- Why did GameStop Corp. (NYSE: GME) spike so much?
- What’s the deal with sudden broker restrictions?
They’re all good questions. I’ll get to them. But really, the even bigger question is this:
Will the stock market ever be the same?
Table of Contents
A Seismic Shift in the Stock Market
As my social media followers and SteadyTrade Team members know, I’ve been talking about this for ages.
In recent years, something has been brewing in the stock market. Call it a movement. Call it a phenomenon.
Me, I’ve been calling it ‘the democratization of the stock market.’
It’s been building for years. Now, the floodgates have opened.
I talked about it in a recent Pre-Market Prep session (a no-cost resource that you can check out every weekday at 8:30 a.m. Eastern)…
This could be the dawn of a whole new age for traders.
Those who take the time to educate themselves about how the stock market works will be best equipped to navigate these choppy waters and take advantage of the many opportunities out there.
StocksToTrade has a ton of resources available to help traders get up to speed:
- A YouTube channel featuring a ton of videos about timely stock market topics.
- Daily premarket sessions where I talk about potential hot plays.
- The SteadyTrade podcast, where we discuss all things trading.
- The SteadyTrade Team, my comprehensive training program where I offer twice-daily webinars and an ongoing stream of stock market knowledge bombs…
The GameStop Squeeze: A Game-Changer
By the time you’re reading this, GameStop could be out of business for all I know. But for a brief, glimmering moment, it was the king of the stock market.
To demonstrate, here are some interesting numbers:
- On January 29, 2020 (a year ago today), GME was trading in the low $4s
- Through the summer of 2020, GME traded mostly between $4 and $7.
- By the end of 2020, it was trading just below $20.
Then, in early 2021, something crazy started happening. It started spiking … From the $40s … up to $100 … and all the way up to a 52-week high of $483.
Check out this chart insanity:
GameStop Corp. (NYSE: GME) year-to-date chart (Source: StocksToTrade)
Listen, I know that video games have been trending recently due to fewer entertainment options available in recent months. I talked a lot about GME as a stay-at-home play for a good portion of 2020.
But that crazy spike was too crazy to account for increased sales of “Call of Duty.”
That’s where Reddit comes in…
The Reddit Coup
Recently, a legion of amateur traders banded together to give Wall Street a serious spanking.
The organizers of WallStreetBets, a Reddit forum, wanted to expose and exploit what they perceived as bottom-feeding Wall Street fat cats.
How’d they do that? They looked for heavily shorted stocks and encouraged a buying frenzy.
Sound familiar? Those are precisely the kinds of plays I look for with the SteadyTrade Team:
- Heavily shorted stocks
- In a hot sector
- Ridiculous volume
GME just happened to be in the right place at the right time, and it happened to be very heavily shorted. It became the poster child of this revolution.
The plan worked. These traders found their edge. Buyers piled in. The share price exploded.
Several other WallStreetBets stocks started exploding too — AMC Entertainment Holdings Inc. (NYSE: AMC), Koss Corporation (NASDAQ: KOSS), and Nokia Corp. (NYSE: NOK), to name a few…
As a side note — these companies might all be doomed. But this frenzy really isn’t about the companies at all. They’re all just heavily shorted pawns in this game.
It’s what happened after the stocks started spiking huge that’s really interesting…
The Big Short … Squeeze
Large-scale short selling got a global audience when the movie “The Big Short” came out a few years ago.
A lot of people are making this comparison … But what happened with this Reddit situation has played out a bit differently.
In case you’re not familiar, a short squeeze happens when too many aggressive short sellers pile into a stock that then attracts more buyers than anticipated.
In that case, short sellers must then buy to cover, and the price gets ‘squeezed’ ever higher.
In the case of GME, the run-up was so massive that even the ‘smartest guy in the room’ hedge funders were squeezed out. They reportedly lost a record $1.6 billion in a single day as they were forced to cover.
The Aftermath
Surprise, surprise: Hedge fund managers were not pleased by this turn of events.
Some interesting things started happening in the ensuing days.
On Thursday, January 28, 2021, Robinhood placed restrictions on several of these super-volatile plays, limiting traders to sell-only orders.
Then the government got involved. For a brief shining moment, Alexandria Ocasio-Cortez and Ted Cruz even agreed on something: that it was a super-shady move to limit average traders from buying.
Robinhood resumed buy orders on Friday … And guess what? GME spiked again.
So what does this all mean?
The GameStop-Reddit Experience: Why Now?
Hopefully, I’ve made it clear in this post … This whole event is not really about GameStop at all. It’s not about believing that any of the companies behind these spiking stocks have great long-term prospects.
So why did it happen … Why now? Here are some things to consider…
1. ‘Amateur’ traders want to reclaim power in the market.
This whole event proves that with power in numbers and the right edge, the ‘average’ trader can exploit Wall Street fat cats.
Many up-and-coming traders grew up during the 2007–2008 financial crisis. They saw the bailouts, and many of them have an inherent distrust in large financial institutions. So this move could have been motivated by a desire to ‘stick it to the man.’
2. People have time on their hands.
Without professional sports or too many entertainment options available at the moment, a ton of new traders have hit the stock market. Actually, we talked about this on the SteadyTrade podcast. Don’t miss Ep. 162: Everyone’s Day Trading Now.
3. Access to trading is easier now than ever.
Apps like Robinhood have made it easier than ever to get started as a trader. Just click a few buttons and you’ve got an account. Some have argued that it ‘gamifies’ trading. I’m not going to comment on that, but I do want to make the point that the easy entry has attracted more traders to the market.
4. The age of ‘meme’ stocks.
Some people have made a connection between the Reddit situation and the idea of creating a sharable campaign that goes viral … Only in the stock market, it means potential monetary gains rather than more shares and likes.
It’s an idea we explored on a recent episode of the SteadyTrade podcast … Check out Ep. 184: Lessons From $ZOM: How Celebs, Social Media, & Newbies Can Move Stocks.
Smart Traders = Prepared Traders
Maybe the most important thing I can share here is that it’s SO important to study and observe the market.
Yes, some traders have made incredible gains on these recent spikes. But just because a stock is hot doesn’t mean everyone should jump on the bandwagon.
These spikes are scary, volatile, and there isn’t much that the chart can really share about past performance. In short, these stocks are a pretty big gamble.
It’s perfectly OK to NOT trade at times like this.
Honestly, I’d rather see traders watch and learn from this experience rather than potentially blow up their accounts or try to guess the top or bottom of these plays.
In my opinion, the best thing traders can do now is focus on their education. That means watching how these patterns play out, observing how the news cycle creates spikes, and learning from all of it. Being prepared is half the battle!
StocksToTrade is one of the most powerful tools traders can use to prepare. I work for STT for a reason — I believe it’s one of the best stock screeners out there.
The Breaking News chat is one of my favorite tools on the platform — it helps me understand the news catalysts that move stocks. Plus, STT’s charting features make it easy to see what’s what with the price action!
See for yourself … Get your 14-day trial of StocksToTrade for only $7. Even better — grab a 14-day trial of STT with the Breaking News Chat add-on for just $17. But I’ll warn ya, you’ll fall in love with it.
What do you think? What’s next for these crazy spikers? Leave a comment…
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