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GameStop reverses larger, rising 16% because the inventory shrugs off new dealer limits

Ramin Talaie | Bloomberg | Getty Images

GameStop stocks rebounded in a troubled Thursday session after brokers restricting stocks appeared to trigger a sell-off of more than 20% in the first few minutes.

The stock rose more than 25% just before 10 a.m. ET after falling on the opening bell. The stocks rose at one point in premarket trading and at one point momentarily exceeded $ 500 each in premarket. The stock began to fall when it became known that Robinhood and Interactive Brokers were restricting trading.

The wild moves come on a massive scale after a rally of more than 130% on Wednesday, which has lifted gains to 466% for weeks. The stock was worth about $ 40 a week ago.

On Thursday morning David Tepper, founder of Appaloosa Management, said CNBC investors should play carefully with speculative names.

"It was Partyon.com screwed the shorts on in 1999 and now it's gangup.in. It didn't end well in 1999 when the dotcom bubble burst. Got done there. Old scars," he said of Joe Kernen CNBC.

GameStop was a brand new target on WallStreetBets Reddit chat room, where an army of retail investors came together to drive stocks higher and displace hedge funds short selling. The forum, which now has more than four million members, was briefly privatized Wednesday night as moderators said they could "not ensure Reddit's content policy".

A trending post on Thursday said, "Don't be afraid of $ GME $ BB falling. Hedge funds are trading by the hours to scare you all … BUY AND HOLD." The post quickly drew more than 1,000 comments in an hour.

Another top post in the community said "Buy high, never sell" and featured a photo from GameStop.

Some of the avid Reddit users have shared screenshots of their brokerage accounts showing tremendous returns from trading GameStop and other names.

"The action in GameStop stock is a game of musical chairs, and I advise investors to sell before the music stops," said David Trainer, CEO of New Constructs. "As moody as the retail mob was to pick GameStop as one of their favorite stocks, they could also be moody about when to drop the stock."

The Reddit crowd targeted other heavily shortened names including Bed Bath & Beyond and AMC Entertainment.

AMC climbed 300% on Wednesday alone, bringing its weekly rally over 450%. In the previous session, more than a billion shares changed hands in AMC, marking the highest volume day of all time. Bed Bath & Beyond is also up 75% this week. The duo gave way in premarket trading on Thursday.

The extreme speculative behavior of rookie investors worries many on Wall Street as rising losses from hedge funds could spill over into other areas of the market. Some also believe that this buying frenzy could hurt overall market confidence and destabilize conditions.

The S&P 500 and Dow Jones Industrial Average suffered their largest loss since October on Wednesday as concerns about the mania deepened.

Reddit co-founder Alexis Ohanian said Thursday that GameStop's trading frenzy marked a turning point in the U.S. investment landscape.

"I think this is a crucial moment. I don't think we'll go back to a world before then because these communities are a by-product of the connected internet," Ohanian said in a Squawk Box interview. "Whether it is one platform or the other, this is the new normal."

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