What GME’s wild ride is telling us about the rest of the market

Free After-Hours Analysis:

I don’t cover penny stocks because a lot of unsavory things go down in that shady portion of the market and it isn’t suitable for most investors. That said, I never expected to see penny-stock style manipulation occur in a well-known, billion-dollar company.

No doubt almost everyone is aware of the sheer craziness going on in GME. The stock rallied nearly 1,000% since January 1st, with the biggest portion of that move taking place this morning. But not to be outdone, this morning’s 150% gain was quickly erased by a 50% plunge from the highs a few hours later. Easy come easy go.

While it is tempting to jump aboard this seemingly easy trade, these things are best watched from the sidelines. A lot of people are going to lose a lot of money trading this and you don’t want to be one of them.

That said, I’m not really interested in analyzing the crazy hive-mind driving GME’s wild swings. But I am interested in what something like this tells us about the state of the broad market.

Having been around for the wild dot-com days, there are some noteworthy parallels. While most of the market isn’t outrageously overvalued, there are several companies that have been driven to undeservedly high levels. GME is only the tip of the iceberg. TSLA being the fifth most valuable company despite the fact it hasn’t figured out how to turn a profit selling cars is a concern. (TSLA’s profits come from selling tax credits, not cars.)

By all accounts, the Robinhood crowd has lost its mind. And while it seems like a big pullback in the share price of GME, TSLA, and bitcoin shouldn’t affect the wider market. This fails to take into account stock valuations are a game of confidence. If one segment pops, that stink spreads to everything around it. Given how far we came since the March lows, there is a tremendous amount of air underneath us if sentiment flips from a half-full to a half-empty.

That said, even with all of the warning sirens going off, these things usually go even further before they pop. We might be in the later innings of this game, but we are not at the end and it is most definitely not time to abandon ship simply because a few stocks have gone “too far”.

The greatest strength we have as independent investors and traders is the nimbleness of our size. We can flip from full-long to full-short with a few clicks of the mouse. We don’t need to predict the market when we can react to it in real-time.

Stick with what is working as long as it keeps working. But be ready to get out once the cracks start showing because when this goes, it could get really ugly.

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