What happened
A tough day for the broad market is proving to be a brutal one for a handful of the market's most watched and most speculative names. Meme stocks GameStop (GME 1.07%) and AMC Entertainment (AMC 8.22%) are down 16.5% and 17.1%, respectively, as of 11:58 a.m. ET Monday. Lower-profile names of the same ilk like entertainment company Genius Brands (GNUS -2.70%) and autonomic driving tech outfit MicroVision (MVIS -4.11%) are also lower (to the tune of 11.7% and 11.1%, respectively, in those instances). The steep sell-offs are being driven not by any alarming news from or about these companies, but by the fact that traders are collectively adopting a new mindset.
So what
In retrospect, no one can be completely surprised.
All four aforementioned meme stocks were artificially buoyed at some point during the pandemic by coordinated efforts meant to spark short squeezes for each. And those efforts worked. The problem with this particular dynamic is that all the stock purchases made prior to these respective short squeezes can only be turned into a profit now by closing out these trades with a sale. Selling of course applies bearish pressure to a stock, sending it lower when there aren't enough buyers around to sop up the excess supply of a stock.
Image source: Getty Images.
To this end, in all four cases today's weakness merely extends profit taking that actually began in earnest in the latter part of last year, if not by the middle of last year. MicroVision shares are now down more than 80% from September's prices. AMC Entertainment is off by 60% since November. GameStop is 60% below its November peak. In that it's easy for investors to conclude that a stock's recent trend will be sustained, these meme stocks were and still are particularly vulnerable to marketwide weakness.
Now what
It's a conundrum for would-be buyers. The selling now is almost as artificial as the buying was then. Investors know it will end sometime and these stocks will once again reflect the value of their underlying companies' operations. The question is, When?
While nobody knows the answer to that question, investors looking for balanced risk/reward scenarios probably don't want to plow in just yet despite the incredible depth of the selling thus far.
That's not to suggest today can't mark a major bottom for any or even all of these meme stocks. The fact of the matter is, however, all four of these names are still carrying around the proverbial baggage of first-time traders, speculators that got in too early or too late and are now nursing unrealized losses, and institutions (including the companies and insiders themselves) that continue to capitalize on the strange dynamic created back in 2020. As long as those echoes are still ringing, these tickers remain trapped in a game of tug-of-war between buyers and sellers who aren't especially interested in these companies' actual fundamentals.
In other words, long-term investors waiting for the best bargain price may not want to step in just yet. It's better to be a little late buying into a rebound than way too early.
