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Not With a Bang But a Whimper

Not With a Bang But a Whimper

Posted May 17, 2024 at 11:00 am
Steve Sosnick
Interactive Brokers

So ends the latest round of meme stock frenzy, or at least I hope so.  I love discussing unusual situations in the markets – and social media-fueled buying frenzies in a seemingly unrelated cadre of stocks certainly is unusual – but after a week of actively commenting upon GameStop (GME), AMC Entertainment (AMC), and the like, it’s time to shift our focus to more weighty topics.  But not quite yet…

Today’s news that GME is selling stock has put yet another damper on this week’s runup.  Quite frankly, they are a few days too late.  We noted on Tuesday that “And AMC signaled that its stock was a better sale than a buy, when it sold 72.5 million shares yesterday.”  When the stock rallied further on Tuesday, they sold even more stock.  I give credit to its management for this.  They have used the periodic levitations in AMC’s stock price to sell shares in order to pay down some of their onerous debt load.  That is why, despite another bout of heavy dilution, that stock is well above last week’s levels (though well below its craziest highs):

AMC 6-Days, 2-Minute Candles

AMC 6-Days, 2-Minute Candles

Source: Interactive Brokers

Instead GME was late to the game, selling stock into weakness rather than strength.  Hence the underperformance today:

GME 6-Days, 2-Minute Candles

GME 6-Days, 2-Minute Candles

Source: Interactive Brokers

Note that the stock is still up nicely over Friday’s close, but that anyone who bought the stock in the four days prior to today would be losing money.  Not a pretty thought or sight.

Consider this: when a company sells stock, it sends a message – usually not a good one.  Like anyone else, when management believes that its shares are undervalued, they are more likely to buy back stock.  Mind you, there are other reasons they do that.  They might be buying back shares that they issue to employees in order to stabilize the share count, or simply deploying excess cash to benefit shareholders.  But when a company sells stock through a spot secondary offering, it is typically in response to market conditions that have caused management to believe that the stock is a better sale than a buy.  Hint: it’s not when they think the stock is undervalued.

I know that many of you couldn’t resist trading during this bout of volatility.  Over the past five days, GME was the most active stock on our platform and AMC was fourth.  And I sincerely hope that you made money doing so, or at least managed your risk.  But at a minimum, I hope you listened to the signals, either when “Roaring Kitty” tweeted out the “go home” ending of “Ferris Bueller’s Day Off”, or when these companies began selling shares.  There’s an old saying, “they don’t ring a bell at the top.”  But something was clanging this week.

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Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

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