GameStop Stock Boom Prompts Warning from Jim Cramer: ‘The Mechanics of the Market Are Breaking Down’

 

CNBC’s Jim Cramer warned Monday that a shock boom in the price of GameStop’s stock illustrated the “mechanics” of the stock market are “breaking down.”

“We’re seeing a phenomenon that I have never seen,” Cramer said, referring to the soaring price of shares in GameStop, a brick-and-mortar company that sells video games. The price of those shares more than tripled briefly this month, from the $40 range in early January to more than $150 on Monday morning.

The surge took place after Citron Research founder Andrew Left called the company a “failing mall-based retailer” in a report this month and predicted shares of the company would fall to $20. Fans of the company responded by banding together on an online message board, “WallStreetBets,” a forum on Reddit, to buy the company’s stock, resulting in the price surge.

The skyrocketing price will cost Wall Street short-sellers this month — including Left — who pay to “borrow” stocks on the bet their value will decline in the near future. Cramer said big investors might be enraged, but that GameStop’s online fans had legitimately won their defeat.

“It’s the Wall Street bet people,” Cramer said. “They have ganged up — and arguably, it’s allowed by free speech purposes to center on a few stocks.

“The mechanics are rather shocking,” he added. “The mechanics of the market are breaking down. It’s arguable that these people are all one group, but my securities lawyer said, listen, free speech covers it. So you can have cheerleaders buy. … They’re using arguments that they think hold up under scrutiny.”

Institutional investors have been tormented in recent months by market volatility and surging stock prices running contrary to analysts’ predictions. Those issues have been a result of an influx of small-time retail investors using smartphone applications — such as Robinhood — who became more active in buying stocks during the coronavirus pandemic, as well as the federal government’s robust economic stimulus efforts.

“What’s going on in GameStop right now, conceivably, could take a couple of firms out — hedge funds, if they were stupid enough to go all the way, and options sellers,” noted Cramer’s co-host, David Faber.

GameStop’s stock on Monday doubled its Friday closing price of $65, shooting past $150 before plummeting to $61.

Watch above via CNBC.

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