The flood of retail investors piling into markets like the Redditors behind the Gamestop mania has been described as a “harbinger of over-exuberant markets” and evidence of potential equity bubbles brewing. Down on its luck video game retailer Gamestop took the investment industry by storm at the end of January after an army of amateur traders on Reddit targeted the stock, with the intent of sending its shares “to the moon” and letting Wall Street have it. What followed was a frenetic week of trading which saw other beaten up and shorted stocks US cinema chain AMC and out of fashion mobile phone company Blackberry take off. At its peak Gamestop was up 1,500% at $483 a share compared to its $17 price tag at the start of the year. Hedge fund Melvin Capital, which was heavily short the stock, lost more than 50% last month. Since then, the dust has settled, and its shares are back down to $60 with some of the loss of momentum down to brokers Robin Hood, Charles Schwab and Etoro restricting trades as they struggled to cover their positions. Though the Gamestop bubble appears to have burst, the week of explosive trading activity has some investors worried valuations are looking frothy. Ruffer Investment Company likened the situation to prior bubbles formed by speculative trading on margin in its January investment update. The David and Goliath nature of the story has captured the imagination of the press but taking a step back it reveals some more interesting insights into market dynamics. Gamestop is not the only stock accused of being a speculative bubble. Tesla, which has seen its shares rocket 700% in the last year, has been flagged as being overvalued for months. The electric car maker was also at the centre of a squeeze a year ago which caused a massive headache for short sellers like former Jupiter Absolute Return manager James Clunie. Bitcoin has also been hailed as a speculative trade and its violent price swings in 2021 have prompted the Financial Conduct Authority to sound the alarm. But most experts don’t think it’s enough to destabilise the equity market. The speculation has been fairly tightly contained in a handful of stocks that had been well-scoped out by investors beforehand as being heavily shorted and ripe for a squeeze. The failure of this action to broaden out into silver for instance is, according to commentators encouraging as it suggests that the broader market is still more being driven by stimulus, sentiment around the economy re-opening and corporate earnings.

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