Reddit Community r/WallStreetBets Triggers Massive Short Squeeze

Since March of 2020, the market as a whole has been extremely volatile. But, as the saying goes, “stonks only go up,” right? Made famous on discussion sites like Reddit, the idea is that the market, in general, has only gone up in the long run. That is, at least since the 1930s. While there’ve been plenty of corrections along the way, the Dow, for instance, hasn’t ever corrected back to 0.

So are things different following the pandemic? You could definitely make an argument for that. Last year, pandemic lockdowns pushed people back into their homes with or without a job. What can someone do from home that would allow them to make money and not risk contracting coronavirus?

The 2020 Pandemic Created A Trading Army

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You could watch Netflix to your heart’s content, pick up a hobby, or maybe become a social media influencer. Millions of others, however, picked up a new skill like trading. If you look at the penny stock brokerage growth stats from 2020 we compiled, the first 9 months of the year saw a flood of new traders into markets. Many of them chose the Robinhood platform as their starting point. This rush of users also came with a broad mix of traders with different experience levels. Many never traded before, others “tried the markets” in the past, and more were looking to hone their skills.

[Read More] How To Buy Penny Stocks On Robinhood

Nothing was wrong with any of this on the surface. Now, we’ve begun to see the pure madness that is the stock market under a regime. Some are calling this the “Robinhood generation of traders.” That reflects the overwhelming new user growth on the Robinhood app compared to other brokers. Needless to say, how this new group of traders uses technology has been something the market hasn’t seen at scale.

WallStreetBets, Reddit & A Line In The Sand

In this light, social media became the new “Bloomberg.” Groups on Facebook, boards on StockTwits, online chatrooms, and Twitter feeds have become the research portals for new traders. But no other outlet has gained popularity as much as the discussion forum website, Reddit, and lately, one of the top subs for stocks is WallStreetBets.

Famously known for the YOLO-style of trading, these members throw caution to the wind to capture Tendies daily. Members of this sub stand strong against the old Wall Street idea of trading & investing. That ideology reached a tipping point this month. WallStreetBets was at the center of the biggest short-squeeze of the year, so far, in shares of GameStop (NYSE: GME).

Less than a year ago, the video game retailer was considered a penny stock. Shares were trading around $2.60, and names like Michael Burry were building positions in the company. While the last few months have been considerably stronger for the stock, the last 2 weeks have been the stuff of legend. On January 13th, GameStop shares opened trading at $20.24, nearly 10x where it was trading in January. By all accounts, this was a big win for those looking for penny stocks to buy in April and held through January.

Did Chewy Help Light The Fuse?

Then unusual volume began to come into the stock, trading more than 19x the previous day’s volume. This above-average activity hasn’t stopped since. The root of that? GameStop Corp. struck a deal with Chewy Inc. (NYSE: CHWY) co-founder Ryan Cohen to add him and two former colleagues to its board. Last year he pushed the company to focus on digital sales instead of retail. Redditors on WallStreetBets began praising the move by GameStop and further called for a rally that could only be compared to the movie, The 300, taking a stand against Wall St. heavyweights trying to short the gaming retailer.

The Line In The Sand & A Penny Stock Up 13,706% Since April

This was the proverbial line in the sand drawn by retail traders. What has ensued is an epic short-squeeze that sent shares of the former penny stock to all-time highs of $354.83. Since its 52-week lows in April 2020 of $2.57, GameStop stock has mounted a rally of more than 13,700%.

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“Oddly [“For What It’s Worth” by Buffalo Springfield] might be an anthem for the younger investors who have flooded the Wall Street Bets site with positive commentary about GameStop, the long-in-decline brick and mortar store that has been the target of perpetual shorts all the way down from $47 five years ago to $4 in 2020,” Mad Money host Jim Cramer wrote in his Real Money column.

We even saw people like Tesla (NASDAQ: TSLA) CEO Elon Musk pay homage to WallStreetBets in a tweet that said, “Gamestonk!!” with a link to the subreddit. Other famed investors like Chamath Palihapitiya, chairman of Virgin Galactic (NYSE: SPCE), went the YOLO-route as well. In a multi-tweet series, Palihapitiya asked his followers what he should buy next. The ultimate consensus was GameStop. He said, “Lots of $GME talk soooooo….We bought Feb $115 calls on $GME this morning. Let’s gooooooo!!!!!!!!”

What has been an incredible side-effect of this is the sympathy trading in heavily shorted stocks. We see Redditors in WallStreetBets as well as the PennyStocks and RobinhoodPennyStocks subreddits taking on a similar mob mentality calling for focuses on certain companies. This week, current and former penny stocks like Nokia (NYSE: NOK), Express (NYSE: EXPR), Bed, Bath, & Beyond (NASDAQ: BBBY), and even BlackBerry (NYSE: BB) took to the skies.

A New Way Of Trading Or Just The Flavor Of The Month?

Whatever your feeling is on what’s happening in the stock market, it’s begun changing the fabric of traditional trading. Does it make sense that GameStop is now a multi-billion dollar company with no apparent recent fundamental changes? Should beaten-down retail stocks like Express be trading at 2-year highs after a year like 2020?

Right now, we’re seeing the birth of the new-school trader. These traders have found that working in unison for the same goal at the same time can send shockwaves across the market. What’s more, is that this new generation has some of the most forward-thinking minds rooting for it. Palihapitiya and Musk are just a few names that seem to support the new Wall Street. But if or when the Securities & Exchange Commission will weigh in is something to keep in mind. Will this truly mark a paradigm shift for Wall Street, or is this just a short-term trend in the market?

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