Why GameStop Stock Soared 20% Today

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© Provided by The Motley Fool Why GameStop Stock Soared 20% Today

What happened

Shares of GameStop (NYSE: GME) have been relatively calm over the past month. Entering the trading day today, shares were up about 6.5% over the last 30 days. And volatility had also been decreasing, with its 30-day average daily volume dropping 60% in that time. But Tuesday afternoon, the stock looked more like it did in late January, when it became a favorite of retail traders in online forums looking to create a short squeeze. As of 3:30 p.m. EDT, GameStop shares were up more than 15%, just off recent highs of the day. 

So what

This afternoon’s spike happened in concert with other former meme stocks including AMC Entertainment (NYSE: AMC) and Koss (NASDAQ: KOSS), both of which also spiked double digits. There isn’t company-specific news on these names today. Though the short interest on GameStop has plummeted since the frenzy earlier this year, another short squeeze could be possible. 

© Getty Images Bar chart with arrow exponentially rising to the sky representing stocks shooting up.

Now what

GameStop sill had almost 12 million shares sold short as of the end of April; that represents about 18% of outstanding shares. Another concerted effort on the part of the online retail trading crowd could conceivably create another short squeeze similar to January’s, but it wouldn’t have nearly the staying power. Shares held short have declined by about 80% since then. 

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Regardless of whether that may be occurring again, longer-term investors should have learned a lesson from the exponential January rise and subsequent crash of GameStop shares. Ultimately, the underlying business will determine whether its valuation can hold, not short-term traders.

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Howard Smith 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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