‘Reddit Rally’ Stocks Bounce on Day After Selloff, Then Dip After Hours

By Chuck Mikolajczak

(Reuters) – GameStop and other social media darlings rebounded in calmer trading on Wednesday from their sharp sell-off in the prior session as investors turned their focus to the possibility of tighter U.S. trading regulations.

However, the so-called “Reddit rally” cooled again in after hours trade, as GameStop and AMC Entertainment, the main targets hyped on investment forums, fell.

Mass buying over the past two weeks by amateur traders following posts on social media fueled a fierce rally in companies that big hedge funds had bet against, including videogame retailer GameStop and cinema operator AMC.

GameStop had soared as high as $483 last week, fueled by posts on the Reddit forum WallStreetBets, then dived and on Tuesday fell briefly below $90.

On Wednesday GameStop shares closed up 2.68% at around $92.41. They seesawed all day but within a range, while shares of AMC rose 14.71% a day after dropping 41%.

After the closing bell, GameStop was off 2.61% while AMC dipped 2.23%.

Some professional investors bemoaned the volatility and warned that retail investors who piled in could ultimately face big losses.

“The fundamentals are well known and obviously the stock prices have detached from the fundamentals,” said Stephen Massocca, senior vice president at Wedbush Securities. “I have told people just stay away, it is dynamite and who knows when, how or where it blows up.”

Many Reddit users on WallStreetBets exhorted one another to stay in the stocks despite the big swings.

“Hold and buy more” AMC shares, wrote Reddit user Avocadochicken93, “TO THE MOON AND BEYOND!”

Silver prices advanced modestly after surging on Monday to eight-year highs, and analysts expected more volatility, even after Reddit posts urged traders to avoid silver.

The head of the U.S. Securities and Exchange Commission will meet with Treasury Secretary Janet Yellen and heads of the Federal Reserve and the Commodity Futures Trading Commission as soon as Thursday, a Treasury official told Reuters. The SEC is reviewing social media posts for signs of potential fraud, Bloomberg News reported, citing unnamed sources. [L4N2K94J4]

Yellen has asked to discuss volatility and promoting fair and efficient markets.

Her meeting will probably include “some disguised reference to GameStop somewhere on the fringes, but it probably won’t be called out specifically,” said Robert Pavlik, chief investment strategist at SlateStone Wealth LLC in New York.

Experts expect focus to fall on the ever-larger role played by hedge funds and other non-bank firms in financial markets.

Online brokerage app Robinhood will allow investors to buy parts of shares in GameStop and AMC.

St. Louis Fed president James Bullard said frenzied trading is not the result of the Fed’s loose monetary policy.

EXPOSED INVESTORS

Regulators have not yet signaled what form any official actions could take. Potential targets range from retail brokers’ capital requirements to questioning the fee-free brokerage model.

This issue is global. European regulators are monitoring the risk that a surge in retail investors and online brokers could create bubbles inflated by social media, France’s AMF markets watchdog said.

The benchmark S&P 500 closed slightly higher and the CBOE volatility index eased for the third straight session. [.N]

“There isn’t much of a worry that this is a signal that could destabilize the whole system,” said Simona Gambarini, markets economist at Capital Economics.

Other so-called “meme stocks” caught up in the Reddit rally rose on Wednesday, with headphone maker Koss Corp and home furnishing retailer Bed Bath & Beyond rising 27.95% and 10.40%, respectively. BlackBerry Ltd’s U.S.-listed shares were up 3.9%, following a 21% slide a day earlier.

All of those shares also fell after hours.

GameStop, AMC, BlackBerry and Koss did not respond to Reuters requests for comment. Bed Bath & Beyond declined to comment.

GameStop named three new executives Wednesday to further a push into e-commerce that began moving the stock in January.

The number of shorted GameStop shares edged higher, according to the latest data from analytics firm S3 Partners.

The retail trading boom drove volumes in U.S. equity options to a record monthly high in January. Some investors may now be turning to “put options,” often used to protect against losses or position for declines in a stock’s price, as an alternative to shorting, analysts say.

(Reporting by Tom Westbrook in Singapore and Sagarika Jaisinghani in Bengaluru; Additional reporting by April Joyner, Chuck Mikolajczak, Lewis Krauskopf, and Saqib Iqbal Ahmed in New York, Nandita Bose in Washington, Susan Mathew, Eva Mathews and Uday Sampath Kumar in Bengaluru and Thyagaraju Adinarayan in London; Writing by Nick Zieminski; Editing by Vidya Ranganathan, Jane Wardell, Bernard Orr, Alden Bentley and David Gregorio)