- AMC is the latest stock “meme”
- Stock is up due to coordinated squeeze shorts
- Pumping and emptying games will continue
AMC is the latest stock “meme”
With AMC up nearly 40% in pre-market trading today, investors are seeing yet another stock of memes explode to the higher despite the absence of any underlying reason behind the move.
The movie industry, which was already in steep secular decline due to competition from home entertainment options, received a near-fatal blow from the COVID pandemic which, to all intents and purposes, shut down the industry completely for almost a year.
With the majority of the country now vaccinated and with most of the American population poised to return to normalcy, the movie industry has seen a modest rebound with the Memorial Day box office showing lukewarm signs of life as “The Quiet Place 2 “grossed $ 48 million – a respectable amount but still tiny compared to years past.
All of this suggests that the movie industry may survive, but only as a ghost of itself, with US ticket sales likely to contract less than 50% from previous years. Movies, like radio, will remain a minor form of entertainment, although some niche segments such as “luxury” cinemas offering full gourmet meals and drinks could be a sustainable business.
The almost fundamental argument for AMC is that IF box office revenue returns to 2018 levels and SI AMC is able to recoup over 50% of all revenue and IF it can sell an additional $ 3 billion in dealerships in plus ticket sales, it’s free. cash flow yield can reach 4% of current market capitalization. But it’s a very tortured explanation why the stock is up over 1600% this year.
Stock is up due to coordinated squeeze shorts
The real reason AMC is on the rise is simply because of coordinated purchases by the thousands of Reddit merchants who are designing yet another short squeeze just like they did with GameStop. In the case of GameStop, a huge amount of purchasing power came from the coffers of Melvin Capital which was forced to cover its position with losses that some estimate to be over $ 3 billion. It was actually a transfer of wealth from the hedge fund to the army of Reddit traders.
In the case of AMC, short compression dynamics also work, but in a slightly different form. There is no clear major short in the action, rather the buying fury can come from options brokers who are forced to constantly hedge their delta positions. One of the ways that Reddit traders amplify their power is by buying call options rather than the underlying stock, which in some cases can give them the ability to control up to 100. times more shares than they would with an outright purchase of the underlying. Typically, buying options is a zero bet, as more than 80% of them expire worthless. But if the purchase is coordinated, the prices of options will inexorably increase. Option brokers who essentially act like bookmakers in the market and generally try to avoid directional risk at all costs are then forced to buy the underlying stock in order to keep their books balanced, which fuels rising action.
Since stocks can only fall 100% but can go up ad infinitum, the short squeeze becomes an almost endless strategy for printing money, limited only by the amount of capital thrown into the stock. As long as Reddit can recruit new traders or convince existing traders to keep increasing the position, the stock continues to trade higher and higher.
Pumping and emptying games will continue
Reddit trading is pure market manipulation trading done in broad daylight, but because coordination is done through persuasion rather than overt agreement, regulators have no way of controlling it. This is why the Reddit army business has become unstoppable. As long as retail traders continue to bulk buy and amplify trading through options, any small cap stock can be pumped and emptied with impunity.
Ultimately, this behavior will create serious market destabilization. Ultimately, some hedge funds, HFT transactions, and options brokers will find a way to completely incinerate retail capital, but for now, endless short-term trading continues in search of the next brand. easy.