Regression to the meme

Some time back I was writing posts regarding the Redditt groups and the push by these groups into both momentum trades and into highly shorted stocks. You are probably familiar with this group action, which recently has been tagged as “meme stock trading”.

I’m pretty sure the term “meme stock” came from the somewhat tongue-in-cheek name applied to a cryptocurrency known as Dogecoin – taken from one of the original memes using a dog as the background model.

Truthfully, the older I get, the less able I am to keep up with all of these social media based themes and trends. Whatever the case, I thought I’d look at a few of these trades today – just to see if there are some technical trading opportunities within this “buy beaten stocks and flip them on the momentum” trading strategy. Need I tell you that this is a mugs game that is NOT suitable for anyone outside of a gambling/short termed trading mentality? If so – then I am telling you now. This is a game of the gambler – not an investor.

As a bit of history, Seeking alpha noted: “The meme trade began with GameStop (GME) back in January was partly a strategy (short squeeze), partly a gamble and partly a middle finger to Wall Street (little guy vs. the suits).”

Meme trades work like this: Retail “investors” throw money (often COVID stimi- cheques)  into one stock without caring about risk management or diversification – aided by access to commission-free trading. They are searching for a momentum name or a short squeeze candidate.

Examples of the short squeeze trade include:

Gamestop (GME) as noted above

Hertz (HTZ) being bid up during bankruptcy last summer

Kodak (KODK) same story

Examples of the momentum trade include:

Tesla (TSLA) up until this February, where it ended up being worth more than every carmaker on earth combined despite a fraction of their sales and profits

Bitcoin (BTC), Dogecoin (DOGE) etc.

 

What’s new in the world of meme trades?

Current trades that are apparently getting the attention of the meme crowd include AMC Entertainment (AMC), Blackberry (BB), World Wresting Association (WWE), Clean Energy (CLNE), GEO Group (GEO), Clover Health (CLOV) and even Wendys (WEN)

For kicks n giggles, lets go through a few of the charts to see if there are opportunities for more upside This is a PG-rated blog, suitable only for adults willing to take on high risk trades only.

WWE

What’s not to like about huge dudes smashing chairs over each others heads in a confined ring? This stock displays a classic bottom base breakout- the $60 neckline was recently broken. Off WWE go!

WEN

Remember the commercials with Dave Thomas, founder of Wendy’s burgers? You just liked the guy! If WEN breaks out through the $24 lid its been facing for quite some time (2019), I’d like the stock, too!

GEO

GEO is a real estate trust in the US. I’d trust this trust if the downtrend were more succinctly broken and a base established. It is trying to do so- Worth watching for those looking for a reversal trade.

Conclusion

If meme trading is the new short termed trading strategy, then timing is everything. You can own a meme trade until the last trader or “greatest fool” has bought…

One final thought: With the meme trade spreading to new sectors and industries, will stock fundamentals still hold water?

Final, final thought….Did they ever?

 

 

quote-teal

5 Comments

  • not related to this Meme blog, I wonder about a possible pullback.
    HAC showed recently they had 30% cash (end May I think).
    Where does value trend sit currently…. I supsect you are GT 10%.
    Your bear-o-meter flashed risk signs recently, implying some level of correction may be in the future.
    Questions: 1) what is going to be the stimulus to influence a general correction? Retail sentiment seems positive so what will make the market movers go to the sidelines?
    2) While I understand the comment go with the flow or don’t buck the trend, one must question the market can’t just go up indefinitly so why not take some money off the table. Would it be prudent to reduce holdings at this time?
    3) Is the probability over the bear-o-meter time horizon that a 20% correction is higher than a 10% or 0% correction?
    Thanks Daddyo

    Reply
    • Daddyo- my target was and remains for the SPX to start trading closer to its 200 day SMA. That indicator lies close to 3800. The stock market always corrects its excess when it reaches 15% + above the 200 day (40 week) SMA. It reached that level recently. So–there are two ways for the SPX to reach its 200 day SMA. It will either pullback to that level (within a few % points of the 200 day SMA) OR…it will trade in a sideways range for a long enough period that the price eventually meets up with the SMA. It would appear that the inflation talk and rate scare delivered by the Fed yesterday may inspire the “pullback” option. We shall see. But either way- I have always said that the market is like a balloon. When it gets too full and stretched too thin, it needs an excuse–a pinprick- to make it pop. The pinprick is not the cause of the pop. It is the excuse. The Fed’s meeting is possibly that pinprick. But the balloon was too tight to begin with. It had to let out some air.

      Reply
      • Well I think this answered my DCPP Question regarding changing from an aggressive portfolio to a low or moderate risk portfolio

        Reply
  • Question re cdn bank sector.
    Looking at ZEB representing cdn banks, it has had a steady run since April 2020. All year 2021 the RSI has been overbought yet banks still climb. So technicals imply more momentum upwards. But is there an upside limit taking into consideration fundamentals (which is Craig’s specialty). Rising interest rates should help their margins. But in 14 months the sector has doubled in value.
    Question… fundamentaly how much higher can banks go. Stock prices are driven by earnings so how much more can their earnings rise? Rising interest rates may cause loan defaults. The energy sector is unlikely to be borrowing heavily compared to previous years. So is this sector vulnerable even though momentum still exists today?
    Thanks Daddyo

    Reply
    • From Craig:
      We may forget that banks are cyclical. The economy does well the banks tend to do well, and vice versa. The end of February 2020 banks in Canada and the US sold off hard with the rest of the market. Over the next year as you point out the bank returns have been spectacular. In that time the banks had a couple of things happen- 1.) they took huge loan loss provisions (the market expected), only to turn around and revise them lower (improving earnings) 2.) trading revenue has been a pretty strong tailwind as well 3.) the M&A business has been strong as have new issues. Going forward as you point out the higher rates help margins. The banks are also doing a lot to control costs. Technology helps them- instead of 10 floors for staffing perhaps only 7 are needed. Speaking of staffing- many banks did not cut jobs during the height of the pandemic. That is no longer the case. One final thought….The has been an awful lot of currency printed that flows through and is held in the banks. Part of that will help defaults. For how long???

      Reply

Leave a Reply

Your email address will not be published.

Never miss another blog post!

Get the SmartBounce blog posts delivered directly to your inbox.

Topics

Topics

Recent Posts

index drawdown August 22

Pardon me, you have bad breadth

SPX 2008

Recent price behavior vs. Historic bear market patterns: my current strategy

ayn rand inflation

Its always good to hear a different viewpoint

ntr

Opportunity in fertilizers (Part 2 of “You can’t fix stupid”)

ISM

A bit of fundamental data, and this month’s Bear-o-meter reading

spx near

4 reasons I don’t trust this rally

Keith's On Demand Technical Analysis course is now available online

Scroll to Top