The Meme Stock Movement Is Imploding – Don't Be The Last One Out

Barron's and Fortune published articles praising the meme stock investing approach. They are important contrarian indicators. All of their examples of what went right now are collapsing.

Fortune published "What will be the next big meme stock? Chatter on Reddit’s WallStreetBets offers hints" on June 28. Barron's just published (July 12), “Meme Stock Trade Far From Over,” and it is an especially important contrarian indicator. The cover title, atop a drawing of rocket ships with meme stock symbols, is "Meme Stocks Defy Gravity – The boom in retail day-trading persists as Wall Street struggles to respond." Turn to the story and the additional headline gushes: "The Market's MEME Generation – A half-year later, a youthful retail day-trading boom is showing signs that it has staying power." Except that 6-month description is actually only a few days (or hours) of rocket ignition when the stock charts are examined.

The meme stock weather report: Stormy with a threatening outlook

Here are the ten meme stocks discussed in the Fortune and Barron's articles. Note especially each stock’s huge decline from its 52-week high set by the meme investor-caused spike. (And remember that a 50% decline means a 100% rise is required to get back to the high.) 

Why "dangerous" is an appropriate label for meme stock ownership

For meme stock investors still holding on (and believing in the Barron's false description of reality), this is a dangerous time. With the stocks far off their highs, they have a false look of being cheap. Yet, many are still well above the point at which the original action began.

Worse, all have negative fundamentals that offer no bottom price support. The reason is the meme-movement's original success came from buying beaten-down stocks that had high short interest positions. However, despite the occasional story of a hedge fund being taken to the cleaners, Wall Street adjusted quickly. Hence, the stock charts show a spike or two that immediately reversed, sometimes in the same day. This action was just the thing to trap, not Wall Street, but the novice investors who believed the Reddit main pronouncement: Stay together (that is, buy, don’t sell, then buy more). The view was that, by doing so, the meme movement could control and reshape the stock market – or at least the trading in deadbeat stocks.

Instead, what is thought to be a new paradigm is simply a groupthink stock manipulation that occurs in cheap, beaten-down stocks. (See "Stock Market Manipulation" for explanation and examples.)

What about GameStop and AMC Entertainment welcoming the meme investors? Sure. Why not? The buying and holding was helping bail the companies out of financial predicaments. The meme stock investors were even willing to buy up newly issued shares. 

So, where does that leave today’s remaining meme-holders? Looking at one another, hoping the weak sellers are gone and a new run-up can begin. It won’t. 

A good analogy happens in the final scenes of Lawrence of Arabia. With the battles won by Lawrence's loose collection of Arab tribes, cohesion gave way to individual interests. Then the "movement" fell apart as everyone parted ways and returned home.

The bottom line: The meme movement is flaming out, so don't get burnt

As with previous fads, diehards hang on, following their increasingly ineffective leaders as other followers move on. A good description of reality was in The Wall Street Journal (June 21) article, "ETFs Join Bandwagon of Meme Stocks." (Underlining is mine.)

"Some brand-new exchange-traded funds are dabbling in meme stocks, chasing returns to pull in assets… Many professional stock pickers have largely sat out the mania, with some on Wall Street… calling the dramatic run-up in share prices dangerous.

"Still, a few actively managed ETFs are trying to surf the retail meme-stock mania, gambling on their ability to get out in time once the rally eventually fizzles…." 

That gamble involves a major mistake in investing: Trying to sell at the top (which means spotting the falloff in buying and then beating all the other shareholders to the selling punch). Instead, follow the wise advice (attributed to both J. P. Morgan and Bernard Baruch): "I made my money by selling too soon."

This article originally appeared on Forbes.