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What Happens to a Meme Deferred?

By:

Chief Strategist at Interactive Brokers

This morning, once I decided that I wanted to write about the slow demise of the meme stock phenomenon, I ran through some puns that I hoped would be clever.  I was thinking of using “Requiem for a Meme” (which I reserve the right to use at a future date), but then realized that Langston Hughes’ poem “Harlem” summed up my thinking perfectly:

What happens to a dream deferred?

           Does it dry up
          like a raisin in the sun?
          Or fester like a sore—
          And then run?
          Does it stink like rotten meat?
          Or crust and sugar over—
          like a syrupy sweet?

          Maybe it just sags
          like a heavy load.

          Or does it explode?

The imagery uses a bit more poetic license than I would in a typical strategy piece, but the comparisons are largely valid.  As meme stocks and cryptocurrencies have underperformed over recent weeks, the questions are largely valid. 

At the bottom of this piece are some charts that might help you form an opinion as to whether some popular financial products are sagging like a heavy load or exploding.  I picked a selection of popular meme stocks, along with bitcoin.  We see a few themes amidst them:

  • There was clearly meme mania 1.0 and 2.0.  The meme stock “sector” was established in January, when these stocks all had stellar, rapid advances.  GameStop (GME) was the poster child for the first wave, which also favored Koss (KOSS) and BlackBerry (BB).  After the first wave, all these stocks faded quickly, but all of them settled above the levels that prevailed before late January.  They all resurged in June, with AMC Entertainment (AMC) as the leader.  But only AMC and Build-a-Bear (BBW) moved to fresh highs before fading.
  • The declines that we saw in February were more explosive in some cases as well.  The biggest winners in January (GME, KOSS) were the biggest losers.  All the meme stocks gave back most of their gains, but those that rose fastest also declined most precipitously.  The current declines are more of a slow leak than a balloon bursting, however.
  • Bitcoin moves at its own pace.  While cryptocurrencies also exploded higher early this year, the rise was sustained into April rather than petering out in February.  I have posited that there was some investor rotation from meme stocks in to crypto and vice versa, which would explain why bitcoin lagged during meme mania 1.0, and why meme mania 2.0 arose when cryptos sank in May. 

It is reasonable to ask what is pressuring these stocks and cryptos now.  Continued advances require fresh money, and larger stocks require more money than smaller stocks.  As the meme stocks grew in value, that meant that they needed to attract more money into the shares to keep them moving higher.  Meme stock mania took hold while most of us were in lockdown, and many new investors received stimulus money that could be put to work in high-flying financial instruments.  Now we see fiscal stimulus ending and people are returning to work.  The influx of easy money is over, and people have more opportunities to spend their money than in months.  Without a compelling reason to chase the momentum of hot investments, can they continue to be hot? 

My outlook for all these speculative darlings is unfavorable because it is difficult to envision where the source of fresh investment might be.  Most professionals agree that many meme stock valuations are untenable.  That means that institutional investors are unlikely to allocate money to these stocks (this does not include index funds who are forced to buy index components).  Institutions have been known to trade these stocks, but they are mostly so-called “hot money” that move aggressively into fast moving situations before moving onto the next trading opportunity.  And at this point in the cycle, are there any fresh individual investors who aren’t already familiar with these names? 

As I look at the charts of these stocks, I see declining trends and few potential catalysts.  Also, long-term support is well below current levels.  The one significant exception is bitcoin, which is perched precariously at the $30,000 level that has proved to be solid support for a period of weeks.  Unfortunately, each recent bounce off the current support level has been smaller than the previous one.  That is also a worrisome sign for technically oriented traders.

I will end with a song lyric rather than a poem.  Neil Young asserted that “It’s better to burn out than to fade away.”  I’m not sure if that’s applicable for investments.  It can be much easier to exit a fading investment rather than one that is burning out.

All the following are 7-month charts with 3-hour daily bars.  The source for all is Interactive Brokers.

AMC Entertainment (AMC)

AMC

GameStop (GME)

GME

Koss Corp (KOSS)

KOSS

Build-a-Bear Workshop (BBW)

BBW

BlackBerry Ltd. (BB)

BB

CME CF Bitcoin Real Time Index (BRTI)

BRT
Disclosure: Interactive Brokers

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