What The Meme Stock Surge Says About Equity Markets Today

IIt’s like in January again: The so-called “meme stocks” are rising again.

On Wednesday Gamestop (GME) rose by 16% and reached a price level not seen since March. The video game retailer rose another 5% on Thursday as its stock surpassed $ 250. Earlier this month, Gamestop was only priced at $ 162. AMC Entertainment (AMC) had an even better week. On Wednesday, AMC was up nearly 19%. Then on Thursday it rose 35% to over $ 26. The movie theater chain (which almost went bankrupt earlier this year but instead raised more equity for the wave of retail excitement) only doubled this week.

The superficial explanation for these market moves is retail anger at short sellers. In fact, shorts in both companies have risen again since the January frenzy, according to Peter Hillerberg, co-founder and CTO of Ortex Analytics, recently told Market observation. The fact that institutional investors have re-established short positions in these companies suggests one of two scenarios – or perhaps both scenarios that apply at the same time:

The first is that institutional short sellers believed the winter mayhem was a passing fad, and that Reddit’s WallStreetBets forum retail speculators would be quiet at night when vaccines were distributed, the economy began to reopen, and people other opportunities found themselves busy playing around on robinhood.

Of course, this hypothesis proves to be misjudged as meme stocks are about to hit new highs. If anything, bandits of YOLO-oriented speculators are likely to become an integral part of the world of stock markets. Trading with zero commissions is going nowhere. Plus that glowing Profiles The number of millionaire speculators is sure to inspire thousands to try their hand at the stock market and invest in cryptocurrencies.

The supposed dichotomy between retail and institution turns out to be wrong. Back in January, when an army of Reddit merchants drove Gamestop to new heights, established investors and hedge fund managers like Chamath Palihapitiya rushed into the frenzy and saw the opportunity to turn a profit.

Today institutions invest capital in Bitcoin (BTC), once a rebel favorite in retail. Billionaires like Elon Musk and Mark Cuban have supported the meme cryptocurrency Dogecoin. Even CNBC host and institutional fortune teller Jim Cramer is praise Private investors for betting on Beyond Meat (BYND) that has attracted short sellers. Retail investors may be driving the speculative run on meme assets, but institutions and billionaires are involved.

The second scenario is as follows: Some institutional short sellers always expected retail investors to end up reinvesting in meme stocks. It was always planned to close short positions on signs of serious inflows. One can imagine well-paid hedge fund analysts browsing WallStreetBets, looking for posts about short sellers, and trying to quantify the number of angry Reddit users who post about Melvin Capital.

The fact that such a dynamic is even plausible says something important about how the market dynamic has changed in the past year. Short selling a company is a risky bet. The possible disadvantages are theoretically unlimited. Historically, the decision to sell a company has been numerically based on the fact that the company’s shares will go down. that earnings per share are doomed to fail; that the outlook for any number of financial metrics is bleak.

In the brave new world of meme stocks, there is a danger that short selling will be reduced to a game of cat and mouse: the short sellers bet against a stock; then the retail crowd pushes it up again; The short sellers resume trading a few weeks later when the retail volume shifts to another destination. then they remember their old booty and plow their money back. The cycle could go on and on ad infinitum.

Ultimately, the renaissance in meme stocks (and craze for cryptocurrencies in general) over stock markets says momentum is seeping into value, social media chatters weigh on analyst reports, and Reddit is replacing Bloomberg terminals.

Hedge funds, beware: investors are coming for you.

The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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