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)

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.)

The GME move clarified some of my thinking about rotation. The news catalyst appears to be that the company is considering the creation of an NFT platform on Ethereum and a dedicated token. Details are sparse, but I can’t imagine typing a more meme-packed sentence. This may have a whiff of familiarity for those of us who were trading in 1999 when mere consideration of a company creating a website was enough to boost a stock. In this case, however, the intertwining of cryptocurrency and meme-stocks made me consider whether investors who had become disillusioned with the recent declines in bitcoin and other cryptocurrencies were rotating into somewhat overlooked meme stocks.

Consider the following chart, which shows the moves in bitcoin and GME year-to-date:

Year-to-Date Charts of Bitcoin (XBTUSD, candles) and GameStop (GME, magenta)

(Click on image to enlarge)

Source: Bloomberg

I would love to be able to say that I could find a wonderful inverse correlation between bitcoin and GME. I can’t. But it is fair to say that they have tended to move in somewhat opposite directions for most of the year. Bitcoin declined modestly when GME was exploding in January, then rallied in February as GME fell. In March they rose together, but bitcoin touched new highs in April as GME languished. Now we see bitcoin fall as GME finds new life.

I believe it is fair to assert that hot money may flow from one product to the other. Unlike in conventional market rotation, when investors who may be constrained to stocks are forced to move from one equity sector to another, highly speculative traders are essentially unconstrained. Why wouldn’t this money be heat-seeking, looking to move from one hot investment type to another? 

As of now, neither speculative investment – cryptocurrencies and meme stocks – have reached the speculative heights that they saw earlier this year. But there have been viable trading opportunities in each investment class, and it seems as though traders are trying to move from one to the other in one of the more unusual types of market rotation that we have seen.