What's different about the latest meme stocks resurgence?

In the past, they indicated that a stock market bull run was reaching its final stages but not so today

While meme stocks have yet to reach their 2021 highs, traders have still suffered significant losses on short selling against them. Reuters

Meme stocks are making a comeback, again led by struggling video game retailer GameStop and enticing naive traders with dreams of quick riches.

Meme stock frenzy is in danger of turning into an annual event, a heady festival of skyrocketing share prices, Reddit-fuelled share trading insanity and fear of missing out.

Traders can’t resist – at least until their dreams of glory collapse – while commentators rehash last year's warnings about chasing short-term gains and revive Mark Twain’s quote about history not repeating itself but rhyming.

The two main players remain the same, GameStop and AMC Entertainment, although other blameless enterprises also risk getting sucked in.

The catalyst is the same, too. The latest resurgence has been driven by the online reappearance of renowned/notorious US influencer Keith Gill, known as Roaring Kitty, whose social media account triggered the whole meme craze during Covid lockdowns.

Investment platforms are torn between looking sensible and issuing warnings of the risk involved. Either way, the trading fees roll in.

This time, one thing at least is different.

Inaugural meme stock mania, which took us all by surprise in January 2021, came with an added dash of social activism.

Retail traders on Robinhood and other apps convinced themselves they were fighting back against Wall Street hedge funds, who were shorting struggling companies to profit from their collapse, regardless of the effect on livelihoods.

Today, it's all about the money.

The latest meme stocks revival is delighting retail investors but frustrating critics, says Chris Beauchamp, chief market analyst for trading platform IG.

“GameStop shares surged 340 per cent in just 10 trading days. Other heavily shorted companies like AMC, Koss and Tupperware have also rallied,” he says.

They are yet to scale their 2021 “meme mania” peaks, which saw GameStop soar more than 2,000 per cent before crashing, but traders have still inflicted heavy losses on short sellers betting against these stocks.

Mr Beauchamp says this highlights the continued force of the social media-driven retail trading phenomenon, with traders banking quick profits by driving stock valuations far beyond their underlying company fundamentals.

Another thing is different this time. In the past, meme stocks acted as a canary in the coal mine. They indicated that a stock market bull run was reaching its final stages, and it was time to run for the exits.

“Looking at seven well-known “meme stocks” – GameStop, AMC, Carvana, Beyond Meat, Kodak, Palantir and Coinbase – their clustered volatility spikes have at times preceded downturns in the S&P 500, such as the 2022 bear market,” Mr Beauchamp says.

Not so today. “The recent meme stock rallies appear to be an expression of investors' appetite for riskier plays in the current bull market upswing,” he adds.

This sounds like good news, if true.

It’s certainly true that global shares are flying. Over the last month, the S&P 500 is up 5.84 per cent, with London’s FTSE 100 up 5.20 per cent, Japan's Nikkei 225 is up 4.36 per cent and the euro Stoxx 50 up 2.73 per cent.

On a good day, meme stocks smash that, says Myron Jobson, senior personal finance analyst at the Interactive Investor platform.

“On May 13, shares in GameStop surged by more than 74 per cent. The next day, they jumped another 45 per cent in premarket trading,” he adds.

This makes them look like a geared play on the next stock market bull run.

As ever when the potential rewards are high, so are the risks, Mr Jobson warns.

“Treating investing like a spin at a roulette wheel is not a sustainable strategy to build wealth over the long term. The odds are heavily stacked against anyone who attempts to time the market.”

That won’t stop them trying as meme stocks become an established part of online investing, says Mike Owens, senior sales trader at Saxo UK.

“With modern online investment tools, traders will always be on the lookout for price momentum and to take advantage of short-term market moves,” he adds.

There are ways of ramping up or toning down your risk, say, through derivatives or contracts for difference (CFDs).

“Buying call options on these companies allows traders to define the cost of their trade while also potentially generating large gains in the event of a sharp upward price move,” Mr Owens says.

If this sounds like having your cake and eating it, then it probably is. But Joshua Mahony, chief market analyst at Scope Markets, is wary.

“Traders should tread with caution given the experiences of 2021, where dramatic short-term gains gave way to drawn out multiyear collapse for prices,” he says.

It may be no coincidence that cryptocurrencies have enjoyed a comeback at the same time as meme stocks.

After peaking at a record high of $73,135 on March 13, Bitcoin slumped to $58,265 at the end of April. So far in May, it’s up more than 22 per cent to $71,201.

A variety of factors are driving Bitcoin, says Mohamed Hashad, chief market strategist at Noor Capital, including fears of intensified regulatory scrutiny, with the US Securities and Exchange Commission delaying the public listing of crypto wallet operator Exodus Movement and reportedly investigating various aspects of the crypto market.

However, one factor is common to crypto and meme stocks: investors are waiting for the US Federal Reserve to start cutting rates, but are having to be patient as the first cut keeps getting pushed further back.

As investors jostle for first mover advantage, both asset classes are seeing price spikes.

Crypto even has its own meme currency, Dogecoin, and this is also showing signs of life, with its 50-week simple moving average on an upward trajectory. It is set to intersect the 200-week SMA shortly, signalling what traders call a golden cross.

“This pattern historically precedes significant bullish movements in cryptocurrency,” Mr Hashad adds.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says meme stocks are driven by entertainment rather than company fundamentals. The same could be said about crypto.

Just remember you’re playing with real money and “stocks which rocket up on pure speculation, tend to drop back down to earth very quickly”, she adds.

This year’s meme stock revival may be slightly different, but as another old saying goes, the more things change, the more they stay the same.

As the meme stock frenzy continues, remember to invest wisely and only risk money you can afford to lose.