It has been an interesting couple of weeks on wall street. Inflation fears cropped up every second day, while the Fed intimated that raising interest rates is back on the table. Meanwhile, several big-box retailers beat their earnings expectations, and US manufacturing reportedly sprung back to life at a record pace. To top it all off, the US Dollar lost ground to its trading partners.
All the above factors have meant that the US indices have been see-sawing every other day.
At this point in the GameStop short squeeze, which has (admirably) been ongoing for months now, I would expect very little correlation between GME and the market at large.
GME is a beast all of its own, with market forces beyond the general day-to-day pettiness of the major US indices. People trading GameStop stock are not interested in inflationary pressure in the US. They are not interested in commodity prices. They are not interested in when The Fed begins tapering off its stimulus.
They are interested in the camaraderie and taking advantage of a significant oversight on behalf of hedge funds. Above all, they are interested in sticking it to the man and making money from those who have bet against a perfectly fine horse. Is GameStop worth its current market cap? Not at all. Is it a viable business? Most definitely now that it has paid off all of its debt and raised more than half a billion to facilitate its transition into a primarily digital business. However, its valuation is still mostly based on investor’s hope for the squeeze, more so than the Company’s fundamentals.
To make things easy, let us look at the correlation coefficient between GME and the S&P over the past month and compare it to a time in 2020 before the big squeeze began. A value of 1 would indicate that GME and the S&P are highly in sync, while 0 is not so much. A negative value would indicate a negative correlation.
GME has indeed uncoupled further from regular market forces and appears to be in a league of its own. As the above image illustrates, the correlation between GME and the S&P has shrunk. Last year, a moderate correlation of 0.57 existed. Since this time, the correlation has shrunk to 0.19, based on the previous month of data. Such a low figure indicates a very weak correlation.
It will be interesting to see what happens to GME’s price during more extreme market events. Can diamond hands withstand a complete market downturn or a repeat of the 2008 GFC? I guess it would depend on GME’s status as a hedge against a market crash.
Purely based on GME investor’s current motivations, I don’t see why GME couldn’t act as somewhat of a hedge against a broader downturn. The incentives of GMEs investors are aligned elsewhere. Some may sell their lottery ticket to pay for food, etc., but I would expect it to be one of their last investments sacrificed. In this way, GME and its meme coin brethren could be the new Gold and value stocks.
Please note: BlackBull Markets does not offer the option to trade in GME. What we do offer are forex, commodities, indices and a number of major US stocks.