What’s behind the GameStop stock roller coaster

Jacksonville money manager explains short selling

A woman wears a face mask as she walks past a GameStop store in Des Plaines, Ill., Thursday, Oct. 15, 2020. The latest battleground between the proletariat and the hedge funds serving the 1% isnt on just any street. Its on Wall Street. At least, thats the view within an army of smaller-pocketed, optimistic investors who are throwing dollars and buy orders at the stock of video-game retailer GameStop. (AP Photo/Nam Y. Huh, file) (Copyright 2020 The Associated Press. All rights reserved.)

The rush to buy and run of the price of GameStop stocks as well as those of other popular consumer brands in recent days and weeks has been characterized as a David vs. Goliath fight.

While some small-time investors who have speculated on shares and could cash in hefty returns, it has prompted calls of buyer beware, including from Bill Dendy, a Jacksonville CPA and money manager.

Dendy said Monday on The Morning Show this has made the stock market interesting to more people, but the strategy that the app Robinhood employs probably will not end well for those who bought GameStop stock, manias like this usually end in tears unless you know what you’re doing and are in this for the long game.

GameStop went on a stupefying 1,600% run over the last three weeks and became a battleground where swarms of smaller investors see themselves making an epic stand against the 1%. There was a steep drop in the stock price on Thursday, but it rose 70% again Friday after Robinhood said it will allow customers to start buying some of the stock again.

The S&P 500 fell 73.14 points to 3,714.24. It ended the week with a 3.2% loss, its worst week in three months. It ended January with a 1.1% loss, its first monthly decline since October. The S&P 500 is still up 13.6% since the end of October.

Dendy attempts to explain what happened.

“While you aren’t able to sell things you don’t own in almost any other sphere, within the stock tracking world, you can sell a share of stock you don’t own,” Dendy said. “This has been a strategy that many Wall Street, many very well-known traders have utilized for companies that were on their way out, that were going to find very difficult times going forward. We can sell a stock at today’s price knowing that, perhaps, the whole industry is changing. You’re still buying low and selling high, you’re just doing it in reverse order.”

The viral post on Reddit suggested that since the big traders betting against GameStop encouraged everyone to buy the stock, pushing the price higher, knowing that these “short sellers” would eventually have to buy the stock to pay off their bet.

“It’s like of like a chain reaction getting out of control in chemistry,” Dendy said. “The price went very high. That made some people a lot of money, but it’s going to cost money for others.”

Dendy said there’s nothing inherently wrong with short selling as long as it doesn’t rise to the level of market manipulation.

Watch entire TMS interview with Bill Dendy

The maniacal moves for GameStop and a few other formerly beaten-down stocks drowned out many of the other issues weighing on markets, including the virus, vaccine rollouts and potential aid for the economy.

Other forces also weighed on the market. Johnson & Johnson fell 3.6% after it said its vaccine appears to protect against COVID-19, though not as powerfully as rivals. Analysts said the results, which would require just one shot instead of the two required by other vaccine makers, were below expectations.

Calls for regulators to step in are growing louder on Capitol Hill, and the Securities and Exchange Commission says it’s carefully monitoring the situation. Both the Senate Banking Committee and the House Financial Services Committee plan to hold hearings on the GameStop controversy.

“The capital markets need to be less of a casino and more of a place where people ... can invest in companies that are leading the new economy,” said Rep. Brad Sherman, D-Calif., who heads the Financial Services subcommittee on investor protection.

AP Business Writers Joe McDonald and Marcy Gordon contributed.

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