Analyst Advises Against Buying The Dip In AMC, GameStop: 'They May Even Be Shorts'

Shares of meme stocks GameStop Corp. GME and AMC Entertainment Holdings Inc AMC rebounded slightly on Tuesday after taking a beating over the last week.

The mantra for their cult following of investors throughout 2021 has been to have diamond hands and buy the dip, but DataTrek Research co-founder Nicholas Colas said Tuesday that buying the dip in AMC and GameStop could be a costly mistake.

What Is Tax Loss Selling? Even after modest gains on Tuesday morning, AMC shares are still down 22% and GameStop shares are down 18% in the last five days. Colas said tax loss selling is likely one of the main culprits driving the sell-off.

American traders are allowed to offset 2021 capital gains with capital losses on their 2021 tax form as long as they close their losing trades by the end of the trading day on Dec. 31. In addition, up to $3,000 of capital losses can be deducted from ordinary income per year.

In other words, there are plenty of tax benefits to selling stocks at a loss during the last days of the year, especially in a year like 2021 in which the overall market has performed relatively well.

Related Link: 'Bad Omen' For Meme Stocks And The Retail Trading Boom? Here's What The Data Says

More Pressure Ahead: Since AMC and GameStop have both performed very poorly in the last six months, Colas said they make excellent candidates for tax loss selling.

“We advise caution against trying to catch these falling knives. They may even be shorts, if one is so inclined,” Colas said.

Colas warned of a potential bursting of the meme stock bubble back in July. Since that time, AMC shares are down 32% and GameStop shares are down 18%.

Historically, buying the dip in stocks hit by tax loss selling in late December and selling the recovery in January has been a winning strategy. Yet Colas said that strategy is simply too risky when it comes to meme stocks.

“We would caution against trying this approach with meme stocks, and not just the ones we’ve highlighted, but any name where retail investors set the marginal price this year,” Colas said.

Benzinga’s Take: It may be tempting to buy the dip in AMD and GameStop given how much cheaper the stocks are than at any other point in the last six months. But investors should remember that GameStop and AMC’s businesses are still generating heavy losses, yet their stocks are up 941% and 502%, respectively, in the last year.