For nearly six months, retail investors have ruled the roost on Wall Street. Even though retail investors have been putting their money to work in the market for over 100 years, they've never had such an enormous impact on equity prices as they have in 2021.

More specifically, retail investors on Reddit, Twitter, and other social media platforms have been banding together to buy shares and out-of-the-money call options on stocks with very high levels of short interest. The goal for these retail investors is twofold. First, they want to effect a short squeeze -- a short-term event whereby short-sellers (i.e., pessimists betting on downside in a stock) are driven to the exit. And second, since most short-sellers are institutional investors, they want to "stick it to the suits," so to speak.

A couple eating popcorn while watching a film in a movie theater.

Image source: Getty Images.

"Apes" have gone bananas for AMC

Though GameStop was the representative of "Reddit-based trading" for months, it's been replaced by movie theater chain AMC Entertainment (AMC -5.41%), which has provided a bigger year-to-date return.

The army of retail investors who own shares of AMC, collectively referred to as "apes," believe that a large short squeeze awaits the stock. AMC has, indeed, seen the number of shares held short increase over the past couple of months. As of June 15, 2021, Morningstar listed 85.08 million shares as held short, relative to a float of closer to 449 million shares.

In addition to angling for a short squeeze, apes are of the opinion that Wall Street is purposefully manipulating AMC's share price. Peruse any message board and you'll see multiple discussions on dark pool trading of AMC's stock, the implication of naked short-selling (i.e., shorting shares of stock that don't exist), and the idea that hedge funds (affably referred to as the "hedgies") are out to bankrupt businesses by shorting them into the ground.

In other words, AMC's retail investors see themselves as on a mission to take on Wall Street manipulation.

But the kicker is that manipulation is occurring. However, it's not coming from Wall Street. In my view, it appears that AMC's retail investors are the true source of share price manipulation.

A person touching their smartphone, which is displaying a volatile stock chart.

Image source: Getty Images.

AMC is being manipulated, but not by Wall Street

Back in June 1934, the Securities Exchange Act was enacted to cover the secondary trading of stocks, bonds, and debentures in the United States. In this 367-page law that governs what is and isn't legal in the investing world, there's a section on market manipulation. Section 9(a) and 9(a)(2) state (page 87, for those interested): 

It shall be unlawful for any person, directly or indirectly... to effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.

In non-legalese, this means it's unlawful to try to defraud other investors through actions that would artificially affect the price of an underlying security. AMC investors will tell you they simply "like the stock," and that "buying and holding a company isn't illegal." I agree, and so does the law. If AMC investors like the stock, they can buy as much as they want and hold on for as long as they'd like.

However, their actions on social media appear to point to the intentional interference of supply and demand for AMC's shares. Specifically, Reddit traders are using a combination of hype, purposeful ignorance of fundamental operating data, and misinformation to artificially drive AMC's share price higher.

How can I substantiate these claims, you ask? Just search Reddit or Twitter for posts on AMC. You won't have to look long to find the misleading or bullying tactics used to coerce compliance to what looks like a bona fide (yet coordinated) pump-and-dump scheme.

A person texting on their smartphone, with a chat bubble hovering above their device.

Image source: Getty Images.

AMC is hyped incessantly on social media

To begin with, AMC apes use absurd price targets and post thousands of times daily to social media boards to keep interest high. The most common tactic here is to continue proclaiming that a short squeeze is coming (despite there being no guarantee that one will happen) and to throw out an absurd share price level to keep less-informed investors interested.

On Twitter, you'll commonly find people trying to get a hashtag variation of "AMC100k" or "AMC500k" trending. In other words, these folks are trying to make unsuspecting investors believe that AMC is somehow going to run from $2 in January to $100,000 or $500,000 a share. For some context here, $100,000 a share would be a market cap that's well over two times the annual gross domestic product (GDP) of the U.S., while a $500,000 share price would equate to almost three times global GDP (more than $250 trillion). Apple is currently the world's largest publicly traded company at a $2.2 trillion market cap.

These whimsical price targets may sound harmless, but they're a direct attempt to create artificial support with absolutely no fundamental backing.

A person holding a magnifying glass above a company's balance sheet.

Image source: Getty Images.

Efforts to present income statement/balance sheet data is stamped out by social media mob mentality

In my view, retail traders are also manipulating AMC's share price by using social media strong-arm tactics to stamp out any discussion that involves the company's operating performance or balance sheet. And the reason is simple: presenting income statement or balance sheet data would completely destroy the buy thesis on this company -- and the manipulators know it.

Any attempts to discuss the company's operating performance or its more than $5.4 billion in debt are quickly down-voted on Reddit, Yahoo!, and other message boards and labeled as "FUD" (fear, uncertainty, and doubt). Thus, the only message that new investors are going to see is the carefully crafted one that paints AMC as a short squeeze candidate with no apparent downside and tens of trillions in market cap of upside.

But this never-ending confirmation bias doesn't come close to telling the full story. While AMC has raised enough capital to avert bankruptcy in the near-term, the company's 2027 bonds are priced nowhere near par, which implies that bankruptcy still remains a very real possibility (albeit years down the road). That's not FUD. That's a fact.

What's more, ticket sales for the movie industry have been in a fairly steady 19-year sales decline. Even if AMC is building up its market share, the industry has been shrinking on a consistent basis, and will likely continue to grow smaller as streaming and film exclusivity work against AMC.

Furthermore, the company isn't profitable and it burned through $324 million in cash in just the first quarter. 

This is important information that investors should know. If they still want to invest in AMC, that's fine. But purposefully suppressing and hiding concrete facts from unsuspecting investors while up-voting what's essentially hype-driven propaganda doesn't allow people to make an informed investing decision.

A person holding cash behind their back while also crossing their fingers.

Image source: Getty Images.

Misinformation and lies are the foundation of this movement

However, the most egregious sign of manipulation can be seen in the way AMC apes spread misinformation to further this pump-and-dump scheme. Below are some of the examples you'll regularly see, as well as why they're not true.

  • "Apes saved AMC:" False. AMC saved itself by issuing hundreds of millions of shares and high-interest debt earlier this year. Camaraderie is important to keep other retail investors in-line, which is why this falsity has perpetuated as long as it has. The fact of the matter is that AMC's operating performance, and only its operating performance, will determine whether or not it'll be saved.
  • "Hedge fund shorting bankrupts companies:" False. Short-sellers and buyers are just folks hoping for different outcomes. That outcome is ultimately determined by the operating performance of the business. No matter how many shares institutional investors short, they can't drive a company into bankruptcy. Anyone telling you otherwise is lying to you.
  • "Hedge funds control the MSM:" False. AMC's retail investors want you to believe that every institutional investor is evil and that it's a constant David vs. Goliath battle. The fact is hedge funds don't control the mainstream media (MSM). This is misinformation that retail investors perpetuate to keep less-informed investors in-line.
  • "Hedge funds line your pockets:" False. Apes also regularly claim that any journalist, analyst, writer, television personality, and so on, who doesn't precisely see eye-to-eye with them is being paid off by hedge funds or has hedge-fund connections. Again, this is a defense mechanism to perpetuate the "us vs. them" mentality that's needed to keep this pump-and-dump scheme going.
  • "Fundamentals don't matter:" False. The operating performance and balance sheet of a company always matter. And if you don't think they do, go talk to the Washington Prime Group shareholders who saw half their investment evaporate overnight when the company filed for Chapter 11 bankruptcy protection on June 13. Washington Prime had been touted by Reddit traders for its high short squeeze potential just hours before its bankruptcy filing.

In my opinion, AMC retail investors are hypocrites. They preach for transparency and rail against unsubstantiated Wall Street manipulation, yet purposefully block the full story on message boards and continue to spread misinformation to manipulate the price of AMC.

I have no clue how long AMC's share price can remain artificially inflated by retail investors. What I do know is that every pump-and-dump scheme in history has eventually come crashing down. AMC will be no exception.