“Every once in a while, the market does something so stupid it takes your breath away.”
This quote by the American TV personality and host of Mad Money Jim Cramer succinctly expresses the behaviour of the market concerning “meme stocks”. This virtually non-existent term is on the tip of the tongue of every retail trader who has pocketed enviable gains from companies that were struggling to keep the shutters open just a few months back and even those investors who regret not believing in the hearsay in the first place. It was initially taken for granted that meme stocks were just a fad that would fade into oblivion as soon as the investors lose their interest in them but so far, the situation seems to be anything but that. From GameStop to AMC Entertainment with Wendy’s and Clover Health being the latest additions to the list of meme stocks which puts the lid over all the speculations of this mania being finally over, to rest. At least for now.
Let’s take a closer look at this new age phenomenon which caused the indices to go into a flurry because of a few tweets and chats on social media platforms.
Meme + Stock = Meme Stock?
A meme stock can be defined as any stock which has seemingly gone “viral” or has been popularized heavily by netizens on social media thus leading its price to skyrocket due to excessive trading. The surrounding buzz or any interesting snippet about a particular company’s share prompts investors to buy the stock with a bullish sentiment that the share price will most likely increase in the near future so stocks with such ‘short’ interest are mostly favoured by the meme stock community. The name meme stock has been coined on the Reddit platform WallStreetBets because of the explosive volumes of these stocks being traded in the market. The skyrocketing rallies of these stocks have been mainly fueled by retail investors supplemented by information from social media. This motley group of investors caused an uproar on wall street because of their frenzied trading and their social media chatter.
Though they can be traded like any other stock, meme stocks have an important differentiating factor from other stocks which is that they thrive in situations of a short squeeze. If you are wondering what short squeeze is then let’s just say that it is exactly as it sounds. A short squeeze is a situation in the market caused by investors who generate such extraordinary short-term interest in one company that they practically force existing short sellers to close their positions and exit the trade because of the excessive price action happening on the stock.
“Viral” Bets – Soaring Stocks –
HypeEquity Data analysis revealed that ‘short’ and ‘squeeze’ was the most oft used words while discussing meme stocks on Reddit’s WallStreetBets channel and other social media channels which were abuzz with news regarding various stocks which have gone the “GameStop” way meaning their ‘game’ has not ‘stopped’ for these stocks. Some of the popular stocks which have made it to the meme stocks list are –
Prison operator GEO Group Inc.’s share price soared by almost 38%
Clean Energy Fuels Corp. jumped 32%
AMC Cinema has been successful in clocking gains of more than 500 percent this quarter. Its market cap has managed to surge to over $32 billion in a short span of time
Clover Health Investments Corp. has mostly led from the front by rising more than 100%.
The European company Air Berlin rose 138% after surging 54% the day before
Meanwhile, shares of fast-food restaurant chain Wendy’s Inc. dropped a bit after rising by nearly 26% when the endorsements regarding its share were made on social media
More than 14 billion dollars worth of trade has happened on the shares of the Medicare-backed insurance seller which has led to the company’s overall stock market value being $9 billion
Blackberry’s share price jumped by 83% upon its rediscovery by Reddit investors from last year when its share price surged by 280%
The shares of Orphazyme A/S, a Danish company that develops therapies to treat genetic disorders have risen by almost 1,400% during US trading hours
And many more. As per Bloomberg, there are additional stocks that are around 16 in number which have managed to rake in profits up to 100% and this has added a whopping $267 billion to their market cap. Stocks added more than $6.8 trillion globally in just six weeks from January’21 to February’21 alone. Digital currencies were not to be left behind and they too boomed to a market cap of more than $1.4 trillion.
It’s Trending-
As with most memes which are usually based on existing trends, the same has happened with investors. Some visible trends which have gripped netizens cum traders are as follows –
1. The Cannabis and Crypto Chase–
Pot and Cryptocurrencies rode the wave of positive investor enthusiasm by rising 42% and 63% respectively.
2. Day Traders cash in on daydreams-
Intraday Traders have had a spectacular run in the market so far by tracking the most shorted stocks thereby putting hedge funds in a squeeze.
3. Lilliputs which became Gulliver-
The period so far has been a blockbuster segment for the market’s smallest segment. Microcap stocks left their larger counterparts far behind as these stocks witnessed heavy traffic thus seeing inflows of $58 billion in just one week. Pricey midcap stocks weren’t able to catch up to their smaller rivals and their prices went into a downward spiral.
4. The ETF Darlings –
Exchange-Traded Funds (ETFs) oversaw great interest amongst retail investors. Many ETFs shattered records and were able to increase their valuations greatly.
5. The Daring Debutantes-
With many startups and private companies making a splash at the stock markets with their respective IPOs, their debuts were widely regarded as highly successful and performed much better than expectations.
Witnessing these never seen before trends in the market and the visible disruption caused by unlikely factors, it would be greatly crucial if we were to detect a cycle or a pattern of sorts. A Reddit user on WallStreetBets was able to identify some common patterns of meme stocks and came up with the following cycle regarding meme stocks-
1. Early adopter phase: A company is identified to be undervalued by several retail investors, so they start to buy the stock.
2. Middle phase: The stock starts to gain attention from other traders, who join in the process. Its share price elevates even further.
3. Late/FOMO phase: The stock starts to gain attention across social media and other online platforms. Investors start purchasing the shares of the company at once with the fear of missing out on potential profits. This is where short-sellers also join in.
4. Profit-taking phase: The buying stage peaks and some of the first traders involved start to close out positions. This creates a new panic-selling phase as investors do not want to lose money when the share price starts to fall.
5. Set for next cycle: After crashing, the stock may trade sideways and see little activity or no activity for a few weeks or months, until buyers regain interest in the share again.
Follow the Crowd– the new way to trade?
So, looking back at the saga of meme stocks till now - would you consider it be foolish or rather very prudent to assume that following a crowd of investors or a set of popular opinions is the way to make it big in the market? Maybe or maybe not for the time being. Though it would do well to point out that being in the herd has borne well for many people. The tale of GameStop will not be forgotten easily and will be an oft-repeated example whenever there are murmurs of stock market disruption. Social media commentary has indeed managed to change the future of many companies but will stock-related social media chatter be the new age of investing? Probably not. Investing and cashing in on meme stocks is a good skill to have for people looking to make a quick buck but knowing when to exit will also come in handy whenever needed. It is best to plan for a risk scenario instead of being completely swept up in the flow and it would be wise to keep track of the time frame.
All memes become old one day or another. We should take care not to become a meme ourselves by investing in a foolhardy manner in meme stocks. As Warren Buffet always emphasizes- "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." Let’s not forget rule number one.
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