The Latest Meme Stock Craze Is About Out of Gas

In 2021, it was AMC and GameStop.

This year, it’s Kohl’s and GoPro.

They’re called meme stocks, as they’re driven by posts on Reddit’s WallStreetBets.

And bets they are.

While meme stocks sound innocuous, there is a critical factor that causes these names to get sudden interest from retail investors: a high level of short interest.

After all, if you’re short a stock and it starts to rise, you start to lose money on the trade.

That means if investors can engineer a move higher in a heavily-shorted stock, a squeeze could trigger as shorts buy to close.

That’s why heavily-shorted stocks, often unprofitable has-beens in the business world, have periods of strong performance.

That’s been the case the past few months:

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Heavily shorted stocks have outperformed the past few months as the market has rebounded

This outperfomrance in stocks with high short interest suggests that the meme trade is just about played out – and that investors looking to make a quick buck following a few posts on Reddit may be in for a rude awakening.

The rise of meme stocks also suggests that traders are looking for quick moves that they can’t get in the big tech names following their multi-month rally.

It’s not a sign that the markets will crash, but another hint that stocks are overheated and due for a necessary pullback.

Don’t make a new leveraged trade right now – take any leveraged trade you have off the table.

~ Addison

P.S. As always, your reader feedback is welcome: feedback@greyswanfraternity.com (We read all emails. Thanks in advance for your contribution.)

In 2021, it was AMC and GameStop.

This year, it’s Kohl’s and GoPro.

They’re called meme stocks, as they’re driven by posts on Reddit’s WallStreetBets.

And bets they are.

While meme stocks sound innocuous, there is a critical factor that causes these names to get sudden interest from retail investors: a high level of short interest.

After all, if you’re short a stock and it starts to rise, you start to lose money on the trade.

That means if investors can engineer a move higher in a heavily-shorted stock, a squeeze could trigger as shorts buy to close.

That’s why heavily-shorted stocks, often unprofitable has-beens in the business world, have periods of strong performance.

That’s been the case the past few months:

Turn Your Images On

Heavily shorted stocks have outperformed the past few months as the market has rebounded

The rise of meme stocks also suggests that traders are looking for quick moves that they can’t get in the big tech names following their multi-month rally.

It’s not a sign that the markets will crash, but another hint that stocks are overheated and due for a necessary pullback.

Don’t make a new leveraged trade right now – take any leveraged trade you have off the table.

~ Addison

P.S. As always, your reader feedback is welcome: feedback@greyswanfraternity.com (We read all emails. Thanks in advance for your contribution.)

The problems in private credit aren’t going away – they’re compounding. For now, the market is more focused on Iran and oil than private credit. But the trouble compounds.

With the United States conducting what the Pentagon politely calls an “operation” against Iranian military infrastructure, markets have had every reason to be panicky. Instead, the past week delivered something subtler…

Gold has been consolidating after a powerful multiyear rally. Yet with America’s gold reserves equal to only about 3% of federal debt, the metal could still have significant upside ahead.

The Federal Reserve can print money, but it can’t print oil. As energy prices surge and supply disruptions loom, the central bank may find itself with limited tools to fight inflation driven by real-world shortages.

The problems in private credit aren’t going away – they’re compounding. For now, the market is more focused on Iran and oil than private credit. But the trouble compounds.

Gold has been consolidating after a powerful multiyear rally. Yet with America’s gold reserves equal to only about 3% of federal debt, the metal could still have significant upside ahead.