Meme stocks hit the headlines again – what’s the broader impact?
Meme stocks like Gamestop and AMC are back in the headlines, but is it a reason to be worried about this market rally?
What’s driving the move in meme stocks?
Meme stocks like GameStop and AMC are soaring again, delighting retail investors but frustrating critics. GameStop shares have surged 340% over the last 10 trading days after posts from Keith Gill, the central figure of the 2021 meme stock frenzy. Other heavily shorted companies like AMC, Koss, and Tupperware have also rallied.
While still below their 2021 peaks, the recent gains have inflicted heavy losses on short sellers betting against these stocks. Short interest in GameStop hit a 20-month high before the rally. However, there is little evidence yet of a major short squeeze driving the surge.
Options trading has spiked, especially in bullish call options on GameStop and AMC. Retail trading activity has picked up notably but remains below 2021 "meme mania" levels.
The moves highlight the continued force of the social media-driven retail trading phenomenon, allowing quick profits for some but concerning critics who view the valuations as disconnected from fundamentals.
What does it mean for the broader market?
Many investors will see the return of the meme stocks as a sign that this stock market is becoming frothy, driven by high expectations that are doomed to be disappointed.
While meme stock volatility was previously seen as a warning sign of broader market risk-off sentiment, the recent surges in 2024 appear to signal a healthy appetite for risky investments.
A key difference is that the current meme stock swings are being driven more by fundamental factors like earnings, rather than just social media frenzies as in the past.
Looking at seven well-known "meme stocks" - GameStop, AMC, Carvana, Beyond Meat, Kodak, Palantir, and Coinbase - their clustered volatility spikes have at times preceded downturns in the S&P 500, such as during the 2022 bear market.
However, since the October 2023 lows, the meme stock volatility does not seem to be a leading indicator for the broader market. Instead, it likely reflects a risk-on bull market environment where the rising tide is lifting meme stocks as well.
Rather than being a contrary signal, the recent meme stock rallies appear to be an expression of investors' appetite for riskier plays in the current bull market upswing.
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