Rotation Meme Style

Just when you thought they went away, they’re back! Some of the so-called meme stocks came roaring back this week. The moves were not nearly as dramatic as those we saw in January, nor was the list of movers as broad. The chart below shows the year-to-date performance of a selected list of past favorites:

Year-to-Date Charts of GameStop (GME, blue), AMC (red), Koss (KOSS, purple), and Blackberry (BB, yellow)

(Click on image to enlarge)

Year-to-Date Charts of GameStop (GME, blue), AMC (red), Koss (purple) and Blackberry (BB, yellow)

Source: Bloomberg

I believe that some of the rationale for the meme-stock rally is market rotation. Investors are familiar with rotation, the type of movement that we see when investors and traders shift their focus from one sector or theme to another. For example, we saw energy stocks rise this year as tech stagnated somewhat. It is my contention that highly speculative traders, those who speculate on meme-stocks and the like, are rotating from cryptocurrencies to meme stocks.

We are not seeing anything close to the full-fledged meme-stock mania that we saw earlier this year, especially because the list of winners has narrowed. Also, the short interest, while substantial, is nowhere near the levels we saw before the January mania. That said, the moves were spurred again partly by an increase in chatter on Reddit and similar forums after news items that might not normally be considered major positives.   While the movie business is clearly improving, one of the immediate catalysts for AMC was that more shares were available because a large holder (Dalian Wanda) liquidated most of its position. In a normal stock this would not be considered good news, but in meme-land, it means that more shares became available for investing. 

(A quick reminder from Econ 101 – if the supply of a good increases, the price typically declines and vice versa. Commodity prices have been rising because there is currently not enough supply to meet demand. A large supply of new shares on the market should depress prices of those shares unless there is either another catalyst or magical thinking.)

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