Meme Stocks Are Back—Should You Be Worried?
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Key Takeaways
- Shares of apparel retailer Kohl’s spiked Tuesday morning as retail investors piled into the heavily shorted stock.
- With the major stock indexes trading at record highs, individual investors have increasingly turned to speculative assets like cryptocurrencies and high-beta stocks.
- Equity positioning has yet to reach elevated levels that would put the stock market at risk of a sharp pullback, according to Deutsche Bank.
Meme stocks are back in the spotlght.
Shares of apparel retailer Kohl’s (KSS) opened nearly 90% higher Tuesday and online home buying website Opendoor’s (OPEN) shares popped nearly 20% at the open. Neither shared any business updates, but both were major topics of conversation on r/wallstreetbets, the subreddit that fueled the meme stock craze of 2021.
As in 2021, a short squeeze may have been the culprit for the Tuesday morning spike. Nearly 50% of Kohl’s shares were sold short at the end of June, according to data from FactSet. The stock’s rising price could have forced some short sellers to cover their position by buying the stock, adding to the demand driving up its price.
Tuesday’s squeeze was relatively short-lived. Kohl’s stock pared its gains throughout the session’s first 30 minutes and ended the day 38% higher. Opendoor, which more than doubled in value last week and gained another 40% Monday, finished Tuesday’s session down 10%.
Why Are Meme Stocks Back?
The return of meme stocks may have something to do with the stock market’s recent success. Stocks hit a series of record highs in recent weeks as Wall Street cheered tax cuts and pro-crypto legislation, and looked forward to trade deals. The Magnificent Seven rode AI excitement to trade near record highs, with Nvidia (NVDA) becoming the first company to ever reach a $4 trillion market capitalization.
Speculative assets like cryptocurrencies have performed particularly well in recent months. Bitcoin traded at $120,000 on Tuesday afternoon, not far from its all-time high of about $123,000. Ethereum has rallied nearly 60% in the last month. Shares of stablecoin issuer Circle Internet Group (CRCL) skyrocketed about 750% in the two weeks after its IPO in early June.
There have been signs for some time that retail investors were losing interest in the Magnificent Seven after their run-up that started in late 2022. Mom-and-pop investors looking for big gains pivoted into riskier corners of the market, like small caps and more obscure AI plays, in the second quarter, according to data from Vanda Research. That trend accelerated in July, with high-beta equities like Joby (JOBY), Archer Aviation (ACHR), D-Wave Quantum (QBTS), BigBear.ai (BBAI) among the most bought stocks by retail investors this month.
Is Meme Frenzy a Bad Omen?
Flurries of speculative activity like that seen Tuesday are sometimes interpreted as signs of market frothiness, and thus precursors to pullbacks. Though that’s not always the case, and even with stocks at record highs, investors have yet to pile into equities at alarming rates. Deutsche Bank’s measure of equity positioning only rose from “neutral” to “overweight” last week.
“In the absence of a clear negative catalyst, there is room for positioning to continue trending higher,” according to strategist Parag Thatte.
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