The meme stock phenomenon has captivated both Wall Street and Main Street, leading to dramatic price swings and unprecedented market volatility. At its core, this craze is driven by retail investors banding together on social media platforms like Reddit's WallStreetBets to target heavily shorted stocks. What began as a fringe movement has now turned into a financial spectacle, catching the attention of institutional investors, regulators, and even the general public.
Key question: are they the best form of investment for you?
First, let's delve into the recent developments in the meme stock saga, analyze the forces at play, and provide insights on what this means for the broader market.
The Role of Social Media
One of the most fascinating aspects of the meme stock craze is the role of social media in driving market behavior. Platforms like Reddit, Twitter, and TikTok have become the battlegrounds where retail investors share ideas, strategies, and memes. The power of these communities was evident when a post on WallStreetBets could lead to a coordinated buying effort, sending a stock's price soaring.
The rise of meme stocks can be seen as a form of digital activism, where retail investors challenge the traditional power dynamics of Wall Street. By targeting heavily shorted stocks, these investors aim to inflict financial pain on hedge funds and other institutional players. It's a David vs. Goliath story that resonates with many who feel disenfranchised by the financial system.
Keith Gill, known by his online moniker "Roaring Kitty," has become an emblematic figure in the financial world, particularly during the GameStop (GME) rally. His unique blend of humor, insightful analysis, and unapologetic enthusiasm for GameStop made him a leader in the retail investor movement that shook Wall Street.
Gill's analysis was thorough and compelling. He identified GameStop as a deeply undervalued company with significant potential for turnaround, driven by its pivot to e-commerce and new leadership. His insights into the company’s fundamentals, coupled with his entertaining delivery, garnered him a dedicated following.
In January 2021, Gill's investment thesis caught fire. Retail investors on WallStreetBets rallied behind his call, buying up shares and options on GameStop. This massive buying pressure triggered a short squeeze, forcing hedge funds with significant short positions to cover their bets, further driving up the stock price.
Gill's transparency about his own investments, including sharing screenshots of his trading account, added credibility and inspired confidence among fellow retail investors. As the stock soared, Roaring Kitty’s fame grew, and he became a symbol of the power of collective action against institutional investors.
The Original Meme Stock
GameStop (GME)
Let’s take a quick look at GameStop (GME), the original meme stock that ignited the frenzy. In early 2021, GME saw its stock price skyrocket from under $20 to nearly $500 in a matter of weeks. This surge was fueled by a massive short squeeze, where retail investors bought up shares to force short sellers to cover their positions, thereby driving the price even higher. Since that move, GameStop shares split 4-for-1. Adjusting for this split, we see January 2021 highs over $120.
Recently, GME has experienced another wave of buying interest, pushing its stock back into the spotlight. The return of the famed Roaring Kitty on X, formerly known as Twitter, helped fuel the recent interest.
Continued . . .
------------------------------------------------------------------------------------------------------
See ALL Zacks' Long-Term Picks for Only $1
Now you can more confidently navigate the market with Zacks' private investment recommendations. These picks are based on the system that has more than doubled the S&P 500 since 1988 (including bear markets), and pointed investors to 32 double- and triple-digit winners last year alone.
Starting today, for one month, you can follow these exclusive portfolios in real time from the best stocks under $10 to Warren Buffett-style value plays to high-paying dividend stocks.
Total cost $1. No gimmicks.
Special opportunity ends at midnight Sunday, May 26.
See Stocks Now >>
------------------------------------------------------------------------------------------------------
Roaring Kitty’s Twitter Comeback
Last week, Keith Gill tweeted for the first time in months, immediately capturing the attention of his followers and the financial press. His tweet was cryptic yet characteristic, featuring a playful nod to his past videos and investment thesis on GameStop. The tweet quickly garnered thousands of likes and retweets, reflecting the lasting impact Gill has on the retail investor community.
He then followed this up with several video clips. These clips were from dozens of well-known movies like Braveheart and E.T. All of them shared a similar theme, referencing GameStop as well as the return of Roaring Kitty. In the days that followed the tweets, well-known meme stocks all came back to life.
The Impact on Market Dynamics
The meme stock craze has also had a significant impact on market dynamics. For one, it has increased market volatility, as seen in the wild price swings of stocks like AMC Entertainment (AMC), BlackBerry (BB), and Bed Bath & Beyond (BBBY). This heightened volatility has led to a surge in trading volumes, with retail investors accounting for a larger share of market activity.
Additionally, the meme stock phenomenon has forced institutional investors to adapt their strategies. Hedge funds that were heavily shorting these stocks have faced massive losses, leading some to reevaluate their short-selling practices. On the flip side, some institutional players have started to capitalize on the meme stock movement by taking long positions in these stocks or using options to profit from the volatility.
The Regulatory Response
With the rise of meme stocks, regulators have been closely monitoring the situation. The U.S. Securities and Exchange Commission (SEC) has expressed concerns about potential market manipulation and the risks posed to retail investors. In response, there have been calls for greater transparency and stricter regulations on short selling and social media-driven trading.
However, regulating the meme stock phenomenon is no easy task. Social media platforms operate globally, making it challenging to enforce rules and monitor activity. Moreover, any attempts to curtail retail trading could be seen as favoring institutional investors, potentially undermining public trust in the financial system.
The Naked Short
At the center of the meme stock controversy has been naked short selling. Naked short selling occurs when an investor sells shares of a stock without first borrowing them or ensuring that they can be borrowed. This contrasts with traditional short selling, where the seller must borrow the shares before selling them, ensuring that the transaction can be settled.
Naked short selling can lead to significant market distortions. Since the seller has not borrowed the shares, there is no limit to the number of shares they can sell short, potentially creating an artificially high supply of the stock. This can drive the stock price down, even if there is no fundamental reason for the decline.
Before the original GME surge, short interest on GME had reached above 100%, a clear indication that hedge funds had been engaging in the practice of naked short selling. The plan investors had was to buy up shares and force the hedge funds to cover their shorts, causing a short-squeeze which would take the stock higher.
Regulation SHO
There are already regulations in place to mitigate naked short selling. The SEC introduced Regulation SHO to address concerns about naked short selling. This regulation includes provisions such as the "locate" requirement, which mandates that brokers must have reasonable grounds to believe that shares can be borrowed before executing a short sale. It also includes "close-out" requirements to address failures to deliver.
If a broker-dealer has a fail to deliver position in a threshold security for 13 consecutive settlement days, they are required to borrow or arrange to borrow the securities before accepting any further short sale orders in that security from any customer or effecting a short sale in that security for their own account.
There is a list published each day of stocks which have experienced failures to deliver. This is known as the Regulation SHO Threshold list. Persistent non-compliance with Rule 204(b) can result in regulatory actions from the SEC or the FINRA. These actions can include fines, censures, and other disciplinary measures. The aim of these rules and penalties is to ensure that broker-dealers settle their trades promptly and reduce the risk of persistent fails to deliver, thereby maintaining market integrity and investor confidence.
The Latest Meme Stock Madness
The knee-jerk reaction to the return of Roaring Kitty sent several meme stocks surging higher. GameStop saw its shares go from under $20 to $64.83 on Tuesday May 14th. AMC went from under $4 to $11.88. Other short-squeezes occurred in stocks like Faraday Future Intelligent Electric where shares went from 4 cents to nearly $4 in just a few days.
These meme stock investors have grown savvy. Their new targets are stocks with low floats where shorts are a large percentage of the float. Armed with Regulation SHO, they are on the hunt for the next big short squeeze to attack hedge funds with. The problem is, short-sale data is always delayed for the retail investor by two weeks making it impossible to know real-time. Also, with such a long window, 13 consecutive settlement days, before clear violations, shorts operated with virtually impunity. I have seen dozens of stocks pop up for a day or two, only for the shorts to stand on the offer and snuff out the rally.
It is important for investors to understand the risks and the odds that are stacked against them when fighting hedge funds. Simply put, institutional money has a different set of rules. Fighting them can lead to heart-breaking losses for investors. This is meant as a word to the wise. While these meme stocks can have incredible short-term payoffs when the timing is right, they are incredibly risky business.
Conclusion
The meme stock craze is far from over, and it continues to captivate the financial world. While the phenomenon has introduced a new level of volatility and unpredictability to the market, it has also democratized investing and empowered a new generation of retail investors.
The key takeaway for investors is to stay informed, remain adaptable, and be prepared for both the opportunities and risks that come with this new era of trading.
But if you'd rather not contend with constant uncertainty, watch for regulatory developments, and closely monitor social media trends and sentiment, there may be a better investment strategy for you.
Which Companies Are Most Likely To Produce Big Profits?
Today, you have a chance to see the stocks we believe have the most promising upside for the months and years ahead. This intelligence is available in Zacks Investor Collection.
You get unrestricted access to all the real-time buys and sells from our long-term portfolios for just $1. This includes all the real-time buys, sells and market insights from our long-term portfolios.
From growth to value to income, you'll get the buys, sells, market commentary and tools suited for every investor type. Plus, you'll also gain access to:
Stocks Under $10, which pinpoints low-priced stocks with improving fundamentals and earnings outlooks for exceptional growth potential. Buy early and then ride these winners for maximum long-term gains.
Home Run Investor, which turns up the best Zacks Rank growth stocks for the long haul. This portfolio discovers companies with robust earnings momentum that leads to a string of quarterly earnings surprises and a thriving share price.
Value Investor, which tracks stocks selling at 25-50% discounts and pounces just as the market is starting to notice their attractiveness. It patiently rides winners to their maximum long-term potential.
And Income Investor, which leverages the Zacks Rank to find the best dividend-paying stocks for the long haul. Some other selected income-producing investments also lead to outperformance with a smoother ride and lower risk.
All for only $1.
Our private long-term investing services closed 32 double and triple-digit wins last year alone. Even though we can't guarantee 100% success, recent gains reached as high as +188.3%, +200.3% and even +221.2%.¹
Bonus Report! When you look into Zacks Investor Collection, you're also invited to download our Special Report, 5 Stocks Set to Double. Each stock was handpicked by a Zacks expert as their personal favorite to have the best chance of gaining +100% and more in the months ahead.
Don't miss out. This opportunity will end at midnight on Sunday, May 26.
Start Zacks Investor Collection and download your free report, 5 Stocks Set to Double >>
Wishing You the Best on Your Investing Journey,
Dave
Dave Bartosiak worked for several broker dealers as a Financial Advisor and then as a stockbroker before coming to Zacks. He's known for his unique brand of technical analysis known as “Bartosiastics” and manages Zacks Surprise Trader and Blockchain Innovators portfolios. He invites you to see all our long-term recommendations in the Zacks Investor Collection.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.
Image: Bigstock
What's Better Than Meme Stocks?
The meme stock phenomenon has captivated both Wall Street and Main Street, leading to dramatic price swings and unprecedented market volatility. At its core, this craze is driven by retail investors banding together on social media platforms like Reddit's WallStreetBets to target heavily shorted stocks. What began as a fringe movement has now turned into a financial spectacle, catching the attention of institutional investors, regulators, and even the general public.
Key question: are they the best form of investment for you?
First, let's delve into the recent developments in the meme stock saga, analyze the forces at play, and provide insights on what this means for the broader market.
The Role of Social Media
One of the most fascinating aspects of the meme stock craze is the role of social media in driving market behavior. Platforms like Reddit, Twitter, and TikTok have become the battlegrounds where retail investors share ideas, strategies, and memes. The power of these communities was evident when a post on WallStreetBets could lead to a coordinated buying effort, sending a stock's price soaring.
The rise of meme stocks can be seen as a form of digital activism, where retail investors challenge the traditional power dynamics of Wall Street. By targeting heavily shorted stocks, these investors aim to inflict financial pain on hedge funds and other institutional players. It's a David vs. Goliath story that resonates with many who feel disenfranchised by the financial system.
Keith Gill, known by his online moniker "Roaring Kitty," has become an emblematic figure in the financial world, particularly during the GameStop (GME) rally. His unique blend of humor, insightful analysis, and unapologetic enthusiasm for GameStop made him a leader in the retail investor movement that shook Wall Street.
Gill's analysis was thorough and compelling. He identified GameStop as a deeply undervalued company with significant potential for turnaround, driven by its pivot to e-commerce and new leadership. His insights into the company’s fundamentals, coupled with his entertaining delivery, garnered him a dedicated following.
In January 2021, Gill's investment thesis caught fire. Retail investors on WallStreetBets rallied behind his call, buying up shares and options on GameStop. This massive buying pressure triggered a short squeeze, forcing hedge funds with significant short positions to cover their bets, further driving up the stock price.
Gill's transparency about his own investments, including sharing screenshots of his trading account, added credibility and inspired confidence among fellow retail investors. As the stock soared, Roaring Kitty’s fame grew, and he became a symbol of the power of collective action against institutional investors.
The Original Meme Stock
GameStop (GME)
Let’s take a quick look at GameStop (GME), the original meme stock that ignited the frenzy. In early 2021, GME saw its stock price skyrocket from under $20 to nearly $500 in a matter of weeks. This surge was fueled by a massive short squeeze, where retail investors bought up shares to force short sellers to cover their positions, thereby driving the price even higher. Since that move, GameStop shares split 4-for-1. Adjusting for this split, we see January 2021 highs over $120.
Recently, GME has experienced another wave of buying interest, pushing its stock back into the spotlight. The return of the famed Roaring Kitty on X, formerly known as Twitter, helped fuel the recent interest.
Continued . . .
------------------------------------------------------------------------------------------------------
See ALL Zacks' Long-Term Picks for Only $1
Now you can more confidently navigate the market with Zacks' private investment recommendations. These picks are based on the system that has more than doubled the S&P 500 since 1988 (including bear markets), and pointed investors to 32 double- and triple-digit winners last year alone.
Starting today, for one month, you can follow these exclusive portfolios in real time from the best stocks under $10 to Warren Buffett-style value plays to high-paying dividend stocks.
Total cost $1. No gimmicks.
Special opportunity ends at midnight Sunday, May 26.
See Stocks Now >>
------------------------------------------------------------------------------------------------------
Roaring Kitty’s Twitter Comeback
Last week, Keith Gill tweeted for the first time in months, immediately capturing the attention of his followers and the financial press. His tweet was cryptic yet characteristic, featuring a playful nod to his past videos and investment thesis on GameStop. The tweet quickly garnered thousands of likes and retweets, reflecting the lasting impact Gill has on the retail investor community.
He then followed this up with several video clips. These clips were from dozens of well-known movies like Braveheart and E.T. All of them shared a similar theme, referencing GameStop as well as the return of Roaring Kitty. In the days that followed the tweets, well-known meme stocks all came back to life.
The Impact on Market Dynamics
The meme stock craze has also had a significant impact on market dynamics. For one, it has increased market volatility, as seen in the wild price swings of stocks like AMC Entertainment (AMC), BlackBerry (BB), and Bed Bath & Beyond (BBBY). This heightened volatility has led to a surge in trading volumes, with retail investors accounting for a larger share of market activity.
Additionally, the meme stock phenomenon has forced institutional investors to adapt their strategies. Hedge funds that were heavily shorting these stocks have faced massive losses, leading some to reevaluate their short-selling practices. On the flip side, some institutional players have started to capitalize on the meme stock movement by taking long positions in these stocks or using options to profit from the volatility.
The Regulatory Response
With the rise of meme stocks, regulators have been closely monitoring the situation. The U.S. Securities and Exchange Commission (SEC) has expressed concerns about potential market manipulation and the risks posed to retail investors. In response, there have been calls for greater transparency and stricter regulations on short selling and social media-driven trading.
However, regulating the meme stock phenomenon is no easy task. Social media platforms operate globally, making it challenging to enforce rules and monitor activity. Moreover, any attempts to curtail retail trading could be seen as favoring institutional investors, potentially undermining public trust in the financial system.
The Naked Short
At the center of the meme stock controversy has been naked short selling. Naked short selling occurs when an investor sells shares of a stock without first borrowing them or ensuring that they can be borrowed. This contrasts with traditional short selling, where the seller must borrow the shares before selling them, ensuring that the transaction can be settled.
Naked short selling can lead to significant market distortions. Since the seller has not borrowed the shares, there is no limit to the number of shares they can sell short, potentially creating an artificially high supply of the stock. This can drive the stock price down, even if there is no fundamental reason for the decline.
Before the original GME surge, short interest on GME had reached above 100%, a clear indication that hedge funds had been engaging in the practice of naked short selling. The plan investors had was to buy up shares and force the hedge funds to cover their shorts, causing a short-squeeze which would take the stock higher.
Regulation SHO
There are already regulations in place to mitigate naked short selling. The SEC introduced Regulation SHO to address concerns about naked short selling. This regulation includes provisions such as the "locate" requirement, which mandates that brokers must have reasonable grounds to believe that shares can be borrowed before executing a short sale. It also includes "close-out" requirements to address failures to deliver.
If a broker-dealer has a fail to deliver position in a threshold security for 13 consecutive settlement days, they are required to borrow or arrange to borrow the securities before accepting any further short sale orders in that security from any customer or effecting a short sale in that security for their own account.
There is a list published each day of stocks which have experienced failures to deliver. This is known as the Regulation SHO Threshold list. Persistent non-compliance with Rule 204(b) can result in regulatory actions from the SEC or the FINRA. These actions can include fines, censures, and other disciplinary measures. The aim of these rules and penalties is to ensure that broker-dealers settle their trades promptly and reduce the risk of persistent fails to deliver, thereby maintaining market integrity and investor confidence.
The Latest Meme Stock Madness
The knee-jerk reaction to the return of Roaring Kitty sent several meme stocks surging higher. GameStop saw its shares go from under $20 to $64.83 on Tuesday May 14th. AMC went from under $4 to $11.88. Other short-squeezes occurred in stocks like Faraday Future Intelligent Electric where shares went from 4 cents to nearly $4 in just a few days.
These meme stock investors have grown savvy. Their new targets are stocks with low floats where shorts are a large percentage of the float. Armed with Regulation SHO, they are on the hunt for the next big short squeeze to attack hedge funds with. The problem is, short-sale data is always delayed for the retail investor by two weeks making it impossible to know real-time. Also, with such a long window, 13 consecutive settlement days, before clear violations, shorts operated with virtually impunity. I have seen dozens of stocks pop up for a day or two, only for the shorts to stand on the offer and snuff out the rally.
It is important for investors to understand the risks and the odds that are stacked against them when fighting hedge funds. Simply put, institutional money has a different set of rules. Fighting them can lead to heart-breaking losses for investors. This is meant as a word to the wise. While these meme stocks can have incredible short-term payoffs when the timing is right, they are incredibly risky business.
Conclusion
The meme stock craze is far from over, and it continues to captivate the financial world. While the phenomenon has introduced a new level of volatility and unpredictability to the market, it has also democratized investing and empowered a new generation of retail investors.
The key takeaway for investors is to stay informed, remain adaptable, and be prepared for both the opportunities and risks that come with this new era of trading.
But if you'd rather not contend with constant uncertainty, watch for regulatory developments, and closely monitor social media trends and sentiment, there may be a better investment strategy for you.
Which Companies Are Most Likely To Produce Big Profits?
Today, you have a chance to see the stocks we believe have the most promising upside for the months and years ahead. This intelligence is available in Zacks Investor Collection.
You get unrestricted access to all the real-time buys and sells from our long-term portfolios for just $1. This includes all the real-time buys, sells and market insights from our long-term portfolios.
From growth to value to income, you'll get the buys, sells, market commentary and tools suited for every investor type. Plus, you'll also gain access to:
Stocks Under $10, which pinpoints low-priced stocks with improving fundamentals and earnings outlooks for exceptional growth potential. Buy early and then ride these winners for maximum long-term gains.
Home Run Investor, which turns up the best Zacks Rank growth stocks for the long haul. This portfolio discovers companies with robust earnings momentum that leads to a string of quarterly earnings surprises and a thriving share price.
Value Investor, which tracks stocks selling at 25-50% discounts and pounces just as the market is starting to notice their attractiveness. It patiently rides winners to their maximum long-term potential.
And Income Investor, which leverages the Zacks Rank to find the best dividend-paying stocks for the long haul. Some other selected income-producing investments also lead to outperformance with a smoother ride and lower risk.
All for only $1.
Our private long-term investing services closed 32 double and triple-digit wins last year alone. Even though we can't guarantee 100% success, recent gains reached as high as +188.3%, +200.3% and even +221.2%.¹
Bonus Report! When you look into Zacks Investor Collection, you're also invited to download our Special Report, 5 Stocks Set to Double. Each stock was handpicked by a Zacks expert as their personal favorite to have the best chance of gaining +100% and more in the months ahead.
Don't miss out. This opportunity will end at midnight on Sunday, May 26.
Start Zacks Investor Collection and download your free report, 5 Stocks Set to Double >>
Wishing You the Best on Your Investing Journey,
Dave
Dave Bartosiak worked for several broker dealers as a Financial Advisor and then as a stockbroker before coming to Zacks. He's known for his unique brand of technical analysis known as “Bartosiastics” and manages Zacks Surprise Trader and Blockchain Innovators portfolios. He invites you to see all our long-term recommendations in the Zacks Investor Collection.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.