Explainer: Why are meme stocks on Wall Street rallying again?

GameStop and AMC Entertainment have again captured retail investors’ attention, reminiscent of “the meme stock frenzy” that gripped Wall Street three years ago, following social media posts from the leading figure behind that rally “Roaring Kitty”.

Here is what you need to know about the recent surge in meme stocks:

Roaring Kitty and his sketch

Keith Gill, popularly known among traders as “Roaring Kitty”, shared a series of cryptic posts on social media platform X on Sunday following a three-year gap. One of them included a sketch of a man leaning forward in a chair, a popular meme among gamers that indicates things are getting serious.

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With colorful YouTube streams and Reddit posts, Gill made the bull case for GameStop in 2021, helping attract a flood of retail cash into the company.

In Gill’s 2021 testimony to Congress, he denied the notion that he used social media to profit by promoting GameStop to unwitting investors.

Gamestop leads, again

Videogame retailer GameStop has rallied more than 139% since Friday close through Tuesday afternoon, set to add more than $9 billion to its market value. Theatre chain AMC Entertainment has climbed more than 130% following the two-day rally. The highly shorted shares were set for their best 2-day gains since January 2021. Still, both remain well below the 2021 highs.

The pair was also the two most traded stocks by retail investors on Monday, as per J.P. Morgan.

Retail traders also pumped up other highly shorted stocks including solar firm SunPower Corp, headphones maker Koss Corp and storage container maker Tupperware Brands , sending them soaring between 24% and 83%.

Retail market order as a percentage of total market volume increased to 17.5% on May 13 from 14.1% on May 1, J.P.Morgan data showed.

What are meme stocks?

Meme stocks refer to certain company shares that have been boosted by retail investors using trading platforms and social media investment advice.

It burst into the open during 2021 when the COVID-19 lockdowns boosted savings, policy stimulus put cash into people’s pockets and extremely low interest rates pushed investors to the stock market.

ALSO READ: Wall Street week ahead: Investors’ focus on inflation & retail sales data

A proliferation of zero-fee trading apps also encouraged anyone with a smartphone to dabble in stocks.

Thousands of Reddit users on low-cost trading platforms such as Robinhood banded together to drive up the prices of “meme” stocks, squeezing hedge funds that had taken short positions, or bets against those shares.

How is it different this time?

U.S. interest rates are at multi-decade highs following the Federal Reserve’s aggressive efforts to tame inflation and the S&P 500’s gains are concentrated in the shares of a handful of megacap companies.

Many fund managers are also waiting for more commentary from “Roaring Kitty”.

Roundhill Investments last year announced the closure of its exchange-traded fund tracking the performance of meme stocks nearly two years after its launch, putting a nail in the coffin of the popular pandemic-era trade.

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Published: 14 May 2024, 10:47 PM IST

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