The meme stock rally continues, leaving many to question, what the heck is going on? 🤔
While we can’t know exactly what’s going on, we’re going to outline a few theories that might explain the recent action in Bed Bath and Beyond and other retail favorites.
First, we have to remind ourselves that there are two broader angles to the ‘meme stock’ craze.
The first is that, from a stock market perspective, you’ve got retail investors on message boards/online communities targeting stocks with the potential for outsized moves. That could be due to short interest, low float volume, a celebrity or famous investor getting involved with the stock, etc.
Many traders want to make money and make it fast, so they tend to trade the most volatile things they can find. There’s nothing new about that.
The second aspect is that, from an underlying business perspective, the stocks’ activity has given many of these companies a lifeline. They can sell more stock or debt at prices they wouldn’t have been able to before, thus buying them more time to try to turn around their actual business.
That’s partially why most of these stocks hadn’t crashed back to the same prices they were before they became ‘meme stocks’ and rallied a ton.
The media likes to characterize anyone trading these stocks as gamblers, but once you understand the backdrop above, these moves become a bit more understandable. 📰
Now, let’s examine why these stocks have been so active recently. As we said, it’s hard to pinpoint a single reason, but several of these are likely at play here based on what we’re reading.
- A swift shift in market sentiment. Many people are bearish on the economy and, therefore, the stock market, but since mid-June, there’s been a sharp/broad rally. Market participants probably expressed some of their bearish bets by shorting the worst of the worst companies … but since the market continues higher, they’re now getting squeezed. For example, $BBBY had 29 million shares short as of July 29th, which would’ve taken ~4 days to cover at its then average trading volume.
- In stock-specific news, earnings were bad for most of these companies, but maybe not as bad as the market was pricing in. Remember, stocks are priced based on market participants’ future expectations, not a company’s past results.
- Wall Street analysts/strategists downgrading these stocks based on the company’s health while ignoring the mechanics of what’s happening in the stock. Negative analyst/institutional actions tend to stoke the “retail vs. institutions” narrative and further fuel the fire.
- Momentum feeds on itself – once there’s a spark, and a stock begins trending, many people jump on to ride the trend until it breaks.
- Lighter summer trading volumes/activity allows outsized moves to happen more easily.
When it comes to Bed Bath and Beyond, the catalyst many are using to explain today’s move is Ryan Cohen’s bullish bet on the company. An SEC filing showed that in April, his VC firm took a bullish position in out-of-the-money calls with strikes between $60-$80 expiring January 2023.
The stock was up nearly 80% today at the highs but closed up a *mere* 29%. 📈
In terms of the broader ‘meme stock’ trend, this is the same group behavior we’ve seen for decades, this time, it just happens faster because we can all share our thoughts and trade for free in real-time.
If the study of behavioral finance has taught us anything, it’s that human behavior hasn’t changed all that much through history. What changes are the mechanisms through which it’s expressed. 🤷♂️
Besides, if Gamestop or Bed Bath and Beyond were truly a one-off situation, then we wouldn’t have seen a slew of old and new retail favorites taking off over the last few months. Everything from Redbox, Revlon, AMTD Digital (HKD), and Magic Empire Global Ltd. (MEGL) to the more well-known AMC, Blackberry, etc. have been topping the trending charts recently. 😮
While many may think the game of momentum “whack-a-mole” may be silly to play in the stock market, history suggests that it’s not going away anytime soon.
So sit back, grab some popcorn, and watch the market’s amazing moves. 🍿
And if you’re going to play, make sure you only risk what you can afford to lose. History has also shown us that for every big winner in these stocks, there are a lot of losers too.