What meme stock mania says about the market rally
Why it matters: The retail resurgence is the latest signal that investors are willing to take on more risk, as stocks keep hitting record highs and it gets harder to beat the broader market.
What they're saying: "The environment is just kind of ripe for it. We're seeing it in crypto as well," Tom Bruni, editor in chief of Stocktwits, a social media platform for retail traders, told Axios.
The meme stock rally comes as other parts of the market, from the broader index to bitcoin, are also hitting record highs.
Catch up quick: The meme stock craze kicked off during the pandemic, when stimulus checks coupled with time at home to scroll through Reddit threads led to a retail trading boom.
Amy Wu Silverman, an equity derivatives strategist at RBC, told Axios that moment represented a "sea change" that hasn't gone away, though there have been fits and starts of mania since 2020.
The intrigue: The current moment is indicative of a challenge institutional investors also face: how to beat the S&P 500 when Big Tech is the dominant driver of returns.
Retail investors are looking for "catch up plays," Bruni said.
Institutional investors are looking for opportunity as well.
"This is kind of…the deep dark secret, which is like, I don't know, do you have an edge?" Silverman said.
Between the lines: Wall Street is paying more attention to retail activity.
"The biggest question I've gotten recently from my clients is like, how can we get ahead of it?" Silverman said.
"You need to read Wall Street Bets," she said, referring to the uber popular Reddit forum.
How it works: Here's the anatomy of a meme stock, per Bruni and Silverman:
Companies with high short interest (investors are betting against them).
Nostalgia plays and brand names that people can get behind.
A fundamental case for a revival, likely shared on a Reddit thread, which then goes viral and grabs the attention of other investors.
What we're watching: When does the party stop?
Watch for the short squeeze element to be over.
Look for calls outweighing demand for puts on the options market. If that gets really high, it indicates "peak meme frenzy," Silverman said.
Even if the meme stock rally loses some steam, the broader market rally is showing no signs of letting up in the near term.
The bottom line: Meme stock traders are no longer a punchline. They've become a force that Wall Street, begrudgingly or not, has to monitor.
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