Meme Stocks Soar: A Sign of Solid Momentum in the Market or a Top?
The ability of investors, particularly retail investors, to shrug off the intense pain experienced in high valuation stocks from November 2021 through October 2022, and gamble that those same names will rebound has been a hallmark of the remarkable and now broadening rally in the stock market this year.
Most investors would probably not be surprised that the biggest, most well-known tech stocks have soared this year. Indeed, the NYSE FANG Index which is comprised of just ten of these stocks weighted approximately evenly, has jumped about 75% year to date. This mega-cap, high tech index is now back to all-time highs reached in November 2021.
In contrast, many investors might be surprised that meme stocks as a group have risen nearly as much as the NYSE FANG Index this year. The Roundhill MEME ETF (NYSE: MEME) is up ~60% thus far in 2023, in the process bouncing back to August 2022 levels. Despite frequently carrying nosebleed enterprise value-to-revenue multiples, meme stocks generally have much more tenuous fundamentals than the large tech stocks. Most generate substantial negative cash flow. Their principal “attribute” is often a high short interest ratio.
Some analysts believe that investors’ allocating more dollars to meme stocks has a somewhat different feel now than it did during in the giant meme stock rally over the first half of 2021.
“There’s widespread panic buying and catch-up trade from those who risk going into year-end flat while the S&P is up 18%,” said Thomas Hayes of Great Hill Capital.
To be sure, retail investors have grown much more active. According to Vanda Research, small investors have put US$1.27 billion per day into U.S equities in July, near the all-time monthly record of US$1.5 billion in March 2023.
The movement of money into some of the most speculative stocks has been even more pronounced. Note the spike in retail purchases of artificial intelligence-related stocks over the last few weeks.
Of course, giant increases in investor interest in the riskiest sectors of the market could be a contrarian indicator of at least an intermediate market top. An analyst at Triple D Trading recently said, “What we have seen historically is that when short squeezes are happening in some of the zombie-like companies that are burning cash or in really beaten down names, that’s usually more indicative of a sign of the end of the bull market, as opposed to [the] beginning.”
Information for this story was found via Edgar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
