Amateur investors piled further into niche stocks on Tuesday, sending professional short sellers scrambling to cover losing bets, with GameStop skyrocketing for a fourth straight day, thanks in part to Elon Musk.

GameStop surged 50 percent in extended trade after Musk tweeted "Gamestonk!!", along with a link to Reddit's Wallstreetbets stock trading discussion group, where supporters affectionately refer to the Tesla CEO as "Papa Musk." "Stonks" is a tongue-in-cheek term for stocks widely used on social media.

The share spikes of the last few days are raising questions about potential regulatory clampdowns from the US Securities and Exchange Commission.

“Such volatile trading fueled by opinions where there appears to be little corporate activity to justify the price movement is exactly what SEC investigations are made of," said Jacob Frenkel, Securities Enforcement Practice Chair for law firm Dickinson Wright and former SEC enforcement attorney. The SEC declined comment.

Herds of amateur investors on Reddit have long been supporters of Tesla and other hyper-volatile stocks, and their influence appears to be growing.

"I don't think this is a fad, it is a generational shift in how people think about investing their money," said John Patrick Lee, ETF manager at VanEck.

"A retail trader will not lean on Wall Street to manage their money and I definitely now see an antagonistic relationship between the old guard (Wall Street) and individual traders who are on the rise," he said.

As well as GameStop, BlackBerry, also favoured on Wallstreetbets, advanced 4.9 percent and is up 185% this year. An earlier tweet by Musk sent Etsy up almost 9 percent before it reversed its gains.

The surge in recent days - GameStop has increased more than seven-fold to $147.98 from $19  since January 12 - has spurred concerns over bubbles in stocks that hedge funds and other speculative players had bet would fall in value.

Trading in GameStop stock was halted for volatility nine times on Monday and five times on Tuesday.

To some stock market professionals, the recent moves look symbolic of a stock market that may be overvalued at the end of a year dominated by floods of fiscal and monetary stimulus to ease the coronavirus crisis.

The benchmark S&P 500 has gained more than 70 percent from lows last March caused by the coronavirus pandemic.

"This is hardly an environment where informed investors are transacting to establish price discovery," said Mike O'Rourke, chief market strategist at JonesTrading.

Venture capital investor Chamath Palihapitiya said in a tweet that he had bought $115 call options on GameStop on Tuesday morning after an exchange with Reddit founder Alexis Ohanian.

Short sellers in GameStop are down $5 billion on a mark-to-market, net-of-financing basis in 2021, which included $876 million of losses early Tuesday, according to analytics firm S3 Partners.

"GME shorts and longs are in a knockout battle being waged in the stock market as well as social media platforms," wrote Ihor Dusaniwsky, S3's managing director of predictive analytics.

Another stock popular with Reddit investors, Virgin Galactic Holdings, surged 17 percent, and is now up 77 percent year to date.

A bad end

Much of the recent action among Reddit traders has centered around shares that have been heavily "shorted" by other market players - traditionally an area dominated by hedge funds.

Shares in Evotec rallied 8 percent on Tuesday with three traders reporting that hedge fund Melvin Capital Management was closing its short positions after suffering losses on some bets.

Melvin previously held a 6.2 percent short bet against Evotec, according to filings with the German regulator. The fund did not respond to requests for comment.

Short sellers typically bet against stocks of companies that they view as outdated in their business models or otherwise overvalued.

Noted short seller Andrew Left is as convinced as ever that GameStop is a dying business and its stock price will fall sharply. Left shorted the company's stock when it traded around $40 a share and forecast publicly that it would tumble to $20 a share. He said on Tuesday that he was still short the stock.

"Will it end badly? Sure. We just don't know when," said Thomas Hayes, managing member at Great Hill Capital in New York.