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The Death Of Meme Stocks

By Boris SchlossbergStock MarketsJul 12, 2021 06:38AM ET
www.investing.com/analysis/the-death-of-meme-stocks-200590957
The Death Of Meme Stocks
By Boris Schlossberg   |  Jul 12, 2021 06:38AM ET
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  • Memes are losing their luster
  • Summer, dispersion, blow up in crypto—all reasons to avoid the strategy
  • The blow up of Archegos may have killed the hidden institutional flows in the strategy
  • Meme stocks are likely to drift back to the mean 

The meme stock strategy predicated on the sustained and coordinated buying of some of the most worthless and heavily shorted securities in the US markets in order to generate massive explosions in price is quickly losing its luster.

Meme darlings  such as GameStop (NYSE:GME) and AMC (NYSE:AMC) are both down 20% this month as the fervor has clearly cooled.

According to Harris Kupperman of Praetorian Capital Management there may be a few reasons why the meme stock play has run its course.

1. Summer

With the majority of the US population vaccinated against COVID and mobility returning to both business and consumer life interest in day trading may have peaked. Although the new class of US retail traders has constant access to the market via mobile apps, attention may have shifted to more mundane real life concerns as the gamification of finance no longer offers the only source of entertainment.

2. Dispersion

The meme stock strategy is dependent on highly coordinated actions of millions of day traders whose synchronized buying of the underlying and its options can drive stocks higher in a matter of hours as market makers are forced to continuously buy the underlying in ever greater quantities in order to continually delta hedge their position. The method works best when retail speculative capital is focused on just one or two names. At the peak of the mania GME traded nearly 200 million shares on Jan. 22 versus just 1.5 million shares yesterday.

With retail traders chasing many more stories the impact of their actions has been blunted and the feedback loop has turned negative as buying did not necessarily lead to price rises and therefore muted the appetite for more buying.  

3. Crypto

The speculative mania in crypto damaged the meme stock strategy in two ways. First by acting as often  a superior alternative for explosive speculative moves that saw thousandfold increases in certain coins over a matter of days. Secondly as a very efficient destructor of speculative capital. With USD/BTC, USD/ETH and USD/DOGE trading at 50% or more off the peaks the amount of blown up retail capital is significant. Bitcoin at one point had capitalization greater than a trillion dollars and much of the retail flow that jumped on the moves was likely levered exacerbating losses and making fresh forays into meme stock plays more difficult.  

4. Archegos

Perhaps the most interesting reason for the cooling of the meme stock trade has to do with the blow up of Archegos capital. The Archegos saga revolved around the idea of the hedge fund hiding its true holding position of stocks through the use of a total return swap—essentially an institutional variant of the CFD strategy used in retail trading everywhere but the US that allows traders to make directional bets in the underlying security without owning the stock. Similarly, the TRS creates a synthetic long position in a particular stock without the hedge fund becoming an actual owner of  equity. Archegos was not only able to evade US regulations that require hedge funds to disclose their positions but was also able to effectively multiply its levered positions manyfold by entering into TRS agreements with several major Wall Street banks who knew nothing of its total exposure with other counterparties.

After the blow up many of Wall Street banks terminated this practice which may have also affected many other hedge funds who secretly participated in the meme stock runs via the TRS strategy. With most prime brokers now putting an end to this strategy, the institutional capital which may have been the tail that wagged the dog is no longer there to spark the  furious runs.

5. What Next?

With both GME and AMC still trading far, far away from their mean value the potential for massive downside collapse remains very strong. Much of the retail speculative flow in the meme plays adheres to the HODL mentality of crypto with “diamond hands” becoming the shortcut for hold-at-any-cost-as-the-underlying-is-sure-to-rise belief.  But unlike crypto both AMC and GME will have to report actual financial results and as the drab reality of their business operations begins to sink in—with AMC now likely facing fatal changes to their business model as consumer behavior toward cinema going has been permanently altered by the pandemic—the stock prices are likely to follow suit. With volatility still sky high in both names any outright puts on the position are too expensive, so those brave enough to short should do so but fully cognizant that both names could still face a few last gasp rallies that could be vicious in nature. Alternatively those looking for some additional protection could sell covered puts with AMC Aug 50 selling for 13 offering a possibility of a 20% return in 60 days if the stock stays at these levels or drops further.

One final thought. An IPO often marks the end of mania in a particular move. With Robin Hood filing for an offering all signs point to the end of the meme run for now.

The Death Of Meme Stocks
 

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The Death Of Meme Stocks

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Comments (11)
Don Gamestop
Game_Over_Hedgie Jul 20, 2021 5:27PM ET
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10% & 25% 🚀 Looking pretty luster to me! 💎👐🦧
Joshua Sonoma
Joshua Sonoma Jul 17, 2021 4:31AM ET
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Apes triggered and mad.
Joe DiMagico
Joe DiMagico Jul 16, 2021 2:08PM ET
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Cheezuz what duuuzbag
David Zerafa
David Zerafa Jul 12, 2021 10:41PM ET
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what if the apes are simply stubbornly, irreverently just holding the stock? they came back no less than 8 times when they werent supposed to, apes wont quit mostly because of you. they will quit when you shut up.
Premislaw de
Premislaw de Jul 12, 2021 1:47PM ET
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the death of boris schlossberg, directed by robert b weide
Marc-Antoine Simard
Marc-Antoine Simard Jul 12, 2021 11:32AM ET
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Never saw so much FUD. Yahoo, investing, Bloomberg etc... All the same story all released on monday, coincidence? Meanwhile, ETFs directed by AI are buying AMC shares and are selling Wal-Mart and Home Depot. The squeeze is inevitable. All the so called "meme stocks" will rip to unimaginable high and this will happen just before the next economic crisis.
carol foulds
carol foulds Jul 12, 2021 11:32AM ET
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Pathetic isn’t it?
Ly Ta
Ly Ta Jul 12, 2021 10:37AM ET
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…not sure at first why i was drawn to clicked on your story —-now i realize it was because you needed me to pray for you Boris, that you will be forgiven for your lies and deceit.
Ly Ta
Ly Ta Jul 12, 2021 10:37AM ET
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Done!
Tony Ralt
Tony Ralt Jul 12, 2021 10:36AM ET
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Cinema is alive and well. $100M last weekend alone. Don't you hate it when facts get in the way of your foolish theories?
Fred Arrue
Fred Arrue Jul 12, 2021 10:03AM ET
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lol k
Alan Waterman
Alan Waterman Jul 12, 2021 8:56AM ET
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LOL, nice try.
Juan Antonio Berastegui
Juan Antonio Berastegui Jul 12, 2021 8:45AM ET
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xD, good job mate...
 
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