GameStop’s remarkable rise and fall signal that financial market trends may emerge. What does this mean for volatility?
GME, MEME STOCKS, SOFAS, KLOV, WISH, NEGG – TALK POINTS:
- GameStop (GME) volatility and echo in markets may be the start of a new trend
- Irrationality of meme stocks can increase uncertainty and premiums USD, JPY
- What four securities subredditi on page r / wallstreetbets could rise in the future?
GameStop: the beginning of a new trend?
GameStop’s phenomenon could mark the beginning of a market trend: asset price inflation caused by social media. In short, assets can now spread virally. This means that a culture-loving person can now bleed into the markets and exacerbate uncertainty in an area that is fundamentally unpredictable and already prone to irrational oscillations.
Between January 12thth 28-nith this year, GameStop (GME) rose from less than $ 20 to more than $ 450, representing a total profit of about 2,400%. On a daily basis, it earns an average of 150% per day over 16 days. After the peak, meme stocks fell and trading is now below $ 200 per share. But this is not the only meme stock on the market.
Reddit’s pre-trade activities continue to evolve as membership grows and the number of potentially new “viral” assets grows. At the same time, the total capital generated by the accumulation of new users also increased at a proportional rate. This could potentially create greater volatility for future meme stocks.
What stocks can be viral?
To date, the famous subredditi page r / wallstreetbets has gathered more than 10.6 million members, or “degenerate”, as the page playfully calls them. The madness of meme stocks rose to the air as users tried to launch short-squeezed securities such as GameStop and AMC. Many saw it as a movement and rebellion against institutional investors.
The narrative reflects the archetypal story of David vs. Goliath, a retail investor against institutions. As a result, this “resentment mobilization” led to an increase in capital in shares (GME), which had such a bad reputation in principle that it was the shortest security until recently. S&P 500.
This adds an even deeper saying: “The market can remain irrational longer than you can stay solvent,” which is commonly attributed to John Maynard Keynes. Investors now need to understand the new brand of casual, meme-based humor about securities that is already being analyzed from a financial, economic and social perspective. This is now a new “element” in the proverbial periodic table that investors must fight.
Beside the diversion, the rise of GME’s emotional sight attracted the attention of all media and it seems likely that this will be repeated with various securities. Below is a non-exhaustive list of so-called meme stocks, which have often appeared on the subredditi page and may have the potential to experience as much or more volatility as GME or AMC, another early favorite.
Social Finance Inc (SoFi)
Market capitalization: $ 13.47 billion
SOFI – daily schedule
The SOFI chart is created using TradingView
Clover Health Investments Corp (CLOV)
Market capitalization: $ 3,967 billion
CLOV – daily schedule
The CLOV diagram is created using TradingView
ContextLogic Inc (WISH)
Market capitalization: $ 6.778 billion
WISH – daily schedule
WISH chart is created using TradingView
Newegg Commerce Inc (NEGG)
Market capitalization: $ 24,878B
NEGG – daily schedule
The NEGG chart is created using TradingView
Half of them qualify with a relatively higher market ceiling (around USD 10 billion), while the rest can be classified in this context as small-cap companies (less than USD 10 billion). All of them, with the exception of the NEGG IPO in the last 7-8 months, each gained momentum in early June. The catalyst was unclear and it seems impossible to give a fundamental explanation – there is uncertainty.
However, the relatively small capitalization of all these names is more likely to make each dollar increase in the volatility of inflows and outflows compared to securities such as Apple, which has a market value of $ 1 trillion. It’s a double-edged sword. On the one hand, it may offer attractive benefits, given the prospect of a three-digit price increase, amplified by relatively thin liquidity compared to, for example, Amazon.
On the other hand, emotional traders who fear foreclosure are jumping at an irrationally high price, offering gradually lower risk premiums. The potential losses from using derivatives and leverage can be astronomical if the prevailing mood changes.
What happens when the laughter stops?
If the volatility of these and similar assets becomes sufficiently eye-catching, it could spread to wider financial markets and lower the risk tolerance threshold. This can manifest itself in capital flows as an emigration of relatively risky assets – equities, sensitive currencies, Australian and New Zealand dollars and cyclical commodities such as crude oil and asylum US dollar and the anti-risk Japanese yen. Government bonds will also benefit.
In times of confusion and uncertainty, traders place a liquidity premium instead of a potential return when the cumulative mood of the market indicates a reluctance to take risks. However, if negative moods change – excluding any developments that could deepen sales – these flows are likely to change as well.
Looking to the future, the growing intersection of social media and markets could open the door to additional volatility if the irrational nature of the former exacerbates the uncertainty of the latter. The emotional transport behind meme stocks and their ambiguity – as well as the seeming nonsense (in a more traditional analysis) of some newly emerging market considerations (such as viral admonitions to “HODL!” Or staying on sale for a long time) – add another complexity that traders now have to add to their strategies.
– Written by Dimitri Zabelin on DailyFX.com
Contact Dimitri must @ZabelinDimitri