GameStop stock drops 25% as meme rally fades

GameStop (GME) shares fell 25% on Wednesday as a rally among meme names showed signs of fading. The video game retailer's shares are emerging from a two-day short squeeze. GameStop shares are up more than 180% in the previous two sessions.

Shares of AMC (AMC) also fell 17% on Wednesday after the theater chain operator rose 95% over the past two days. In an SEC filing, AMC revealed During Monday's rally, it issued about 72.5 million new shares, raising about $250 million for the company.

Other heavily shorted stocks that fell on Wednesday were SunPower (SPWR), Beyond Meat (BYND) and Children's Place (PLCE).

GameStop shares rose Monday following the re-emergence of Keith Gill, also known as “Roaring Kitty,” whose bull case on GameStop fueled the 2021 meme stock rally.

In a note to clients, Nicholas Colas, co-founder of DataTrek Research, wrote that this recent trading action “feels like an echo of early 2021, when this account fueled a vicious short squeeze in GameStop.”

Colas noted that the move in 2021 was a lot bigger than what we've seen so far this time, with GameStop shares surging 1,500% in January 2021 before losing most of those gains.

However, the pain suffered by short sellers during the original rally three years ago has not deterred bets against these companies.

Keith Gill, known on social media forums as Roaring Kitty, testifies during a virtual hearing at GameStop in Washington, February 18, 2021. The man at the center of the meme stock frenzy during the pandemic returned to the social platform for the first time once in three years on Sunday.  (House Financial Services Committee via AP, file)Keith Gill, known on social media forums as Roaring Kitty, testifies during a virtual hearing at GameStop in Washington, February 18, 2021. The man at the center of the meme stock frenzy during the pandemic returned to the social platform for the first time once in three years on Sunday.  (House Financial Services Committee via AP, file)

Keith Gill, known on social media forums as Roaring Kitty, testifies during a virtual hearing at GameStop in Washington, Feb. 18, 2021. (House Financial Services Committee via AP, file) (ASSOCIATED PRESS)

Short interest in GameStop has remained strong since that meme rally, data from S3 Partners shows, with nearly 24% of the float.

GameStop shorts fell $1.36 billion on Tuesday after losing nearly $900 million on Monday.

“We see continued short-covering due to the rebirth of the meme trade,” said Ihor Dusaniwskydirector of S3 Partners.

According to Colas, a trader shorting a stock that is rising with this kind of aggression has only one option: “Your only choice is to close the position, regardless of the price.”

“In the case of GME, you also fear that retailers will be lured into a repeat of 2021,” Colas added.

GameStop shares tumbled on Wednesday, indicating the rally in meme names is fading.  (AP Photo/John Minchillo, File)GameStop shares tumbled on Wednesday, indicating the rally in meme names is fading.  (AP Photo/John Minchillo, File)

GameStop shares tumbled on Wednesday, indicating the rally in meme names is fading. (AP Photo/John Minchillo, File) (ASSOCIATED PRESS)

The meme frenzy of three years ago captured national attention and attracted an army of retailers during the pandemic lockdowns.

“I don't look at this at all the way I did in 2021, when it was almost a transformative moment, dragging tens of millions of people back into the market,” said Tom Sosnoff, CEO of palatablelive, an options and futures trading platform.

YouTuber Matt Kohrs, who has held positions at GameStop and AMC in the past, said Tuesday that the crucial aspect of “the little guy versus the big guy” during the short squeeze of 2021 still holds true today.

“The perception is that the entire system is set up and isolated for the benefit of the powerful elite. GME is the symbol of the populist movement against that concept,” Kohrs said.

“The only real change I see from a psychological point of view is that we are no longer locked inside ourselves,” he added.

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.

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