What happened
Shares of GameStop (NYSE: GME) were tumbling almost 9.6% in morning trading Tuesday after a pre-holiday week that saw its shares gain nearly 50%. The video game retailer's stock was down to $124.01 at 10:48 a.m. ET today.
There was no news to account for the big drop in the stock, but the same was true last week, either. It's a volatile meme stock that trades more on internet and social media chatter than on the value of the business.
Image source: Getty Images.
So what
GameStop is still a heavily shorted stock with about a quarter of its shares sold short, so it's likely that a lot of short-sellers were covering their positions last week, helping to lift the retailer's stock. As shorts buy back their shares, it puts upward pressure on the stock, creating a cycle that can lead to a squeeze.
Yet GameStop has been through numerous up and down cycles over the past year or so, where a big spike in price is quickly followed by a big drop. Typically shares are quickly trading below the price they were at before the jump started.
Now what
Last week, I warned that GameStop shares will likely follow a similar pattern this time, too, and it could be we're in the first days of that occurring.
The video game retailer has a large cadre of small retail investors who maintain they will continue to hold on to their stock no matter what until the "mother of all short squeezes" occurs to finally shake out -- and possibly financially ruin -- the short-sellers.
Whether something like that eventually happens remains to be seen, but for average investors looking for a stock that's a good long-term investment, GameStop has yet to prove it is one of them.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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