Game over for the Reddit rally? Hot stocks cool quickly

(Reuters) – GameStop shares sold off for a second day on Tuesday and a silver-buying spree led by small investors subsided as the Reddit-driven trading frenzy that has shocked global financial markets appeared to fizzle, at least for now.

FILE PHOTO: Bars of silver are placed on wooden pallets at the KGHM copper and precious metals smelter processing plant in Glogow May 10, 2013. REUTERS/Peter Andrews/File Photo

The videogame chain’s shares, which have see-sawed in a slugfest that has seen billions of dollars gained and lost by hedge funds and other financial investors, were down 48% at $117 in early trading after scaling a high of $483 last week.

Early on Tuesday, short sellers were up $2.5 billion in paper gains, cutting their year-to-date losses to $10.1 billion, according to S3 Partners.

Other so-called meme stocks caught up in the Reddit rally also sold off. AMC Entertainment and Koss Corp each dropped by a third, while BlackBerry Ltd and Bed Bath & Beyond Inc showed double-digit percentage losses.

“The rally is likely over (since) the short positions are pretty well taken care of,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

“That’s the game you play when you do this thing. It can work for a while until it stops working and when it stops working, it reverses pretty quickly.”

Spot silver prices, an alternative focus in the battle between a pack of small traders and Wall Street hedge funds, fell more than 7% after hitting an eight-year high on Monday. The main silver ETF was down 7% in early trading.

Analysts said the silver pullback may show the limits of small investors’ impact in a large market, while posts on the popular Reddit forum WallStreetBets ranged from those giving up on the GameStop trade to calls to stick with the stock.

“The stocks side of things has faded because they all had a look at silver yesterday, but my feeling is they’ll be back, depending on whether retail trading platforms will allow you to buy more than one share,” said Keith Temperton, an equity sales trader at Forte Securities.

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Online broker Robinhood, on whose platform much of the buying and selling has taken place, has also held talks with banks about raising another $1 billion in debt, people familiar with the matter told Reuters.

Analysts at financial institutions continued to predict that the action, which has drawn the attention of regulators and politicians, was likely to fade, and said it was just a question of how soon.

“The hope factor of this stock is very big,” said Chris Bailey, strategist at Raymond James. “So over this year, does the share price continue to go down? The answer is yes. We’ve seen it with internet shares in 2000 and so I think it will happen again.”

Robinhood’s trading app recorded more downloads than any other U.S. trading app last week, despite concerns about its restrictions on transactions involving some heavily shorted stocks.

The GameStop saga is likely to expedite a regulatory review of the role non-bank firms play in financial markets, regulatory experts said.

GameStop, AMC, Koss Corp, BlackBerry Ltd and Bed Bath & Beyond Inc did not immediately respond to requests seeking comment on Tuesday.

‘FROTHINESS TO THIS MARKET’

Broader markets appeared to be moving on from the jitters the frenzied buying triggered, and Wall Street’s main indexes opened higher, building on the previous session’s momentum.

“There certainly exists a frothiness to this market that we are concerned about… (but) we do think that this year has the potential to be a solid one for equities,” said Joseph Amato, chief investment officer of equities at Neuberger Berman.

“Unlike these option-fueled stocks, valuations in general are underpinned by improving fundamentals.”

In London, a sign of still-strong demand came from online greeting-card retailer Moonpig, whose shares leapt 25% in its debut on Tuesday, while emerging markets research house Tellimer pointed to Ping An Insurance and Tencent as being ripe for a short squeeze in Asia.

Tesla Inc billionaire entrepreneur Elon Musk, whose candid tweets about certain companies helped send shares soaring last month, said he was taking another break from Twitter.

CME RAISED SILVER MARGINS

One big drag on silver prices was a Chicago Mercantile Exchange margin hike on contracts for the metal, which makes speculative trade using derivatives more expensive.

U.S.-listed mining stocks including First Majestic Silver and Pan American Silver lost between 4% and 17%.

“It is slowing down a bit,” said Gregor Gregersen, founder of Silver Bullion, a dealer in Singapore, after a wild 24 hours in which he said sales exceeded average monthly levels from 2018 and orders above S$35,000 ($26,300) arrived every three minutes.

Hedge funds raised their bets against Canadian silver-mining stocks, January short-selling data from a market regulator showed.

Some Redditors, meanwhile, stuck to their guns.

“WHO IS HOLDING GME WITH ME?” read one top post. “I’M HOLDING EVEN IF MY PORTFOLIO GOES DOWN TO ZERO,” read another.

In interviews with more than a dozen digital brokerage users, Reuters found a younger generation that approaches trading much differently than the suits of Wall Street. As a result, retail traders and professionals may be tempted to turn the tactic of squeezing short positions into a full-blown investment strategy.

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