Stock Market Madness - The Social Measures Behind GameStop's Sudden Rise

Tanya Sejay, CEO, & Ezequiel Machabanski, CFA

GameStop’s slogan Power to the Players perfectly summarizes a recent betting war that pitted Wall Street money masters against a highly competent and combative online community. Poetic and Prophetic, it seems.

Although it may look like a simple targeted attack against well-known hedge funds, there is more to the story of how a group of Reddit users leveraged the options market to create a short squeeze.

While Wall Street complains that the events are “irrational” and a “decoupling” from a stock’s underlying value, the truth is that these online communities have a voice, and they are being heard around the world.

It’s no coincidence that GameStop’s demographics are sweetly aligned with the demographics of retail investors trading on commission-free platforms, such as Robinhood. We know that in order to create change, there must be a great deal of interest, and those interested must have influence. When those two elements are strong, well, they can move markets and much more.

At the time of writing, GameStop is trading at $132 or 62% lower than yesterday’s close. Capital market participants struggle to comprehend how this erratic behavior conforms or could be explained by neoclassical or traditional theorists. The truth is…… it cannot. Stock prices tend to oscillate around intrinsic value and behavioral economists have argued that sentiment, or the social component, are the basis for these assets to depart from fundamentally justified prices.

Orenda’s Social Positioning indicator, depicted by the blue line in the chart presented below, measures the 50 over 200-day moving average by quantifying social media conversations. As observed, Orenda marked a steady upward sloping trend since May 2020. This translates into communal acceptance of the company’s social alignment as well as the general perception of GameStop being a good investment vehicle. The orange line, capturing stock price for the company, looks to be a lagging variable, which ultimately converges with Orenda’ Social indicator. By examining this data, we can successfully close the gap between traditional finance and the new world by measuring a company’s social alignment with its communities.

Orenda’s unique data validates the undeniable fact that fundamentals are not the sole driver of price performance. This has also been portrayed in the media where many have claimed that retail investors won the battle against hedge funds that considered the stock to be overvalued and have taken short positions.

Far from employing a convoluted model, we demonstrated the importance of measuring online communities in a simple trading strategy. For example, a long trade (buying the stock with the expectation of price increase) would be initiated upon 3 consecutive days of a positive Orenda indicator, while a short trade (betting the stock will decrease in value) would take place upon 3 consecutive days of a negative Orenda indicator. Based on this simple strategy, Orenda generated a total of 147 signals from July 2015 through January 2020. Excluding the period from September 2020 through January 2021, when the price began to increase, and eventually skyrocketed to the recent $350 level, a dollar invested in this strategy would have yielded $1.35 while a dollar invested in a traditional buy and hold strategy would have reached $0.10.

Including the recent roller coaster experience of GameStop stock, the performance of our strategy would have achieved a significantly more robust and appealing result of $22.73 versus $7.67 for the buy and hold strategy.

What is next for GameStop? As the stock continues to experience abrupt volatility, Orenda will continue to collect, quantify, and analyze community conversations on the company and the initiatives they have taken during this erratic stock performance period.

To find out about more, contact us at esg@orenda.digital.