BTIG Analyst Jonathan Krinsky says that ‘meme stocks’ pose a big danger to the stock market and that concentration on a few stocks have actually caused a real concern for investors on Wall Street.
The managing director and chief market technician at BTIG told Bloomberg that an index of meme stocks has gained +10% over the last three days, versus a 1.6% drop by consumer staples as investors back away from perceived safer haven stocks.
“Over the last 18 months, when the MEME index has outperformed the Consumer Staples Select Sector by 10% or more over a three-day period, the SPX [S&P 500 index] was lower three and five days later 12 of 17 times for an average return of -0.83% and -0.68%, respectively,” he told clients in a note published last week.
“Bottom line: It’s a double-edged sword when we start seeing some of the lower-quality names rally. Obviously, it’s encouraging to see breadth broaden out, and this includes the high shorted names and low quality,” said Krinsky.
“When we see a surge of this magnitude, however, especially relative to a defensive group like consumer staples, it often indicates a chase for what hasn’t moved and can move the most, and this often is the tail end of the move, as the numbers in the table below indicate,” he said.
Retail investors argue that if investing in so called ‘meme stocks’ is such a detrimental factor to the broader market, then that’s another problem outside of their control that needs to be addressed.
In a fair and free market, investors get to choose where to put their money in; will regulators now begin to limit the buy of certain stocks?
How about the overleveraged selling of the entire market? ‘Naked short selling‘ has become a bigger and bigger topic ever since the events that occurred in 2021, and a much larger problem than that of retail buying favorite company stocks.
Will Meme Stocks Put Hedge Funds Out of Business Again?
GameStop and AMC shareholders were able to create panic on Wall Street by heavily buying shares of the overleveraged shorted stocks during the ‘meme stock’ frenzy of 2021.
As share prices soared, short sellers experienced massive losses.
GameStop was able to put Melvin Capital out of business, but former Citadel data scientist Patrick McConlogue says other hedge funds were able to make back billions in losses during the halts.
The halts allowed hedge funds to re-enter AMC and GameStop even bigger knowing shares would plummet which allowed them to capitalize on the deflation of the price.
Patrick says the rules of the game also heavily favor hedge funds, something retail investors have urged SEC Chairman Gary Gensler for years to change.
“The game is not fair and it never has been. Individual investors, even when operating in a swarm, are destined to lose. How do I know? I helped design the game,” said McConlogue.
I think many retail investors would agree that there are many other threats in the market than investing in ‘meme stocks’.
But I’m curious to hear what you think about this.
Leave your thoughts in the comment section of the blog down below.
New Report: Illegal Naked Short Selling is Legal for Citadel
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