The market turmoil yesterday has been crazy and has shown no signs of abating. The Dow Industrial Index fell by around 2% while the S&P 500 was down 3.2%. Tech stocks were hit even harder with the Nasdaq down about 4.3%. So far this downtrend has continued until today.
It is in this market environment that GameStop’s (NYSE:GME) stock has remained largely afloat. I know that may be a weird thing for me to say given the price action of GME stock. At the beginning of April, GME stock traded at a high close to $188. Yesterday, it broke down below the crucial psychological support of $100.
However, GME stock rallied from a YTD low of $77.58. I believe that these lows can be tested once again. In other words, there is still more pain to come despite the roughly 40% month-on-month decline.
Remember, the phenomenon of the GameStop rally was a purely liquidity-driven event. In the event of inflation, the Federal Reserve is now making moves to drain that liquidity from the system. According to a Blackrock analyst, “The Ukraine war, a global energy shock and the risk the Fed tries to fight the supply-driven inflation have sparked a reassessment of macro scenarios among market participants.”
This means that the market will eventually need to reassess GameStop on a fundamental basis. In other words, looking at the business, assessing cash flows and all of the other boring stuff we seem to have forgotten how to do. In that case, GameStop isn’t faring that well.
Videogame sales decreased year-over-year for the fifth straight month in March. Compared to the same time in 2021, overall sales were 15% lower. This trend could continue to accelerate as higher prices pinch consumers’ discretionary spending budgets.
Remember that GME stock was trading at around $5 prior to 2021’s legendary short squeeze. Now that the liquidity is gone, there is no longer any reason for it to stay at these elevated levels.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.