The renewed frenzy surrounding high-risk and heavily shorted companies is propelling meme-stock favourites GameStop Corp and AMC Entertainment Holdings Inc higher Wednesday for a third consecutive session.

The video-game retailer surged 31% in US premarket trading, while the beleaguered movie theatre chain jumped 34%. Both stocks - which remain far below their all-time highs - are on track for their biggest monthly gains since the first half of 2021, when the meme-stock mania first swept through markets.

The conditions that drove the surge in stock prices then are no longer present, so this time around the rally not last as long, said Ben Laidler, global markets strategist at eToro.

“This time it is different,” he said. “The pandemic lockdown is over. Excess consumer savings are largely long spent. Short positions in these stocks are much smaller though not small. Interest rates are much higher.”

Social media posts this week by Keith Gill, who drove the meme-stock mania of 2021 under the moniker “Roaring Kitty”, made for effective kindling for this latest rally. Gill shot to fame that year by rallying day traders on Reddit in an effort to squeeze GameStop short sellers.

Traders betting against some of the most heavily shorted stocks are racking up big paper losses. Bearish bets on the pair have lost more than US$1.3 billion in mark-to-market losses this month: GameStop shorts lost US$1.24 billion in May, while AMC shorts lost around US$126 million, according to data from S3 Partners LLC.

Meanwhile, option activity on GameStop continued to surge Tuesday, with total trading volume hitting their highest level since June 2022, and almost 820,000 contracts traded. Put volume soared to more than 10 times the 20-day average and exceeded call volume.

This week’s rally also boosted other high-risk and heavily shorted stocks as traders looked to stocks beyond GameStop and AMC. Some of this week’s big winners include BlackBerry Ltd, SunPower Corp and Virgin Galactic Holdings Inc.

AMC and GameStop were among the top 10 securities bought by retail investors Tuesday, with respectively US$51 million and US$16 million daily inflows, said Giacomo Pierantoni, head of data at Vanda Research.

Bearish news on the consumer price index Wednesday in the US may prompt investors to pull back from risky bets such as those they’re making on the meme stocks, he said.

“Overall, the likelihood of this meme rally persisting will depend on the CPI print today,” said Pierantoni, adding that a “risk-off event will scare retail traders off and push purchases back into traditional products,” while a softer reading on inflation “will probably generate another leg higher”.

  - Bloomberg