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The meme stock surge doesn't appear to be the ominous signal it has been


This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

Meme stocks are grabbing headlines once again.

Household names that captured investors’ imaginations in 2021 — like GameStop (GME) and AMC Entertainment (AMC) — are surging higher (and lower, in some cases).

And while the sudden appearance of meme stock volatility was once a contrary, risk-off warning for stocks in years past, the 2024 surges appear to be signaling a healthy risk appetite for investments.

In a critical break from prior trading epochs, much of the recent meme stock volatility is being fueled by material news and fundamentals, like earnings, as opposed to Reddit (RDDT) posts.

In an ode to the “Magnificent Seven” stocks that have captivated investors’ imaginations — and tried their patience at times — we selected seven retail-oriented, well-known names that, at one time or another, were designated meme stocks in the spirit of the prevailing zeitgeist.

Not surprisingly, the top of the list features the big two, GameStop and AMC. To those, we add: Carvana (CVNA), Beyond Meat (BYND), Kodak (KODK), Palantir (PLTR), and Coinbase (COIN).

To see the clusters of volatility in these seven names, we measured the trailing quarter volatility and aggregated any big moves (at least three standard deviations or more to be precise), both up and down, for all seven names over a rolling window of five days.

The high in the series is 14 and was observed on Jan. 28, 2021 — the very peak of GameStop frenzy.

When these meme stock signals are superimposed on a chart of the S&P 500, they can at times appear to presciently warn of an imminent general market reversal.

This was the case during the 2022 bear market and start of the next bull (highlighted by the red square), when meme volatility preceded four downturns in the general market.

Over this period, when meme stocks surged and grabbed headlines, it was simply a case of laggards catching up. New longs were swiftly met with a sharp reversal that punished the dip-buyers.

Contrastingly, since the October 2023 lows, the volatility signals don’t appear to have predictive value about the general market. One might happily conclude that this is simply a risk-on bull market in which a rising market tide brings up meme stocks too.

If your portfolio is up this year, you might not need seven meme stocks to tell you the market is healthy.

Basing a stock’s performance on earnings and fundamentals as opposed to, well, memes means that quarterly results actually may matter. Which Palantir investors, seeing the stock down 14% Tuesday after Monday’s results, learned the hard way.

And now, on Wednesday, two key players step up to deliver more meme-centric quarterly results: Robinhood, the original accelerant-turned-villain of the movement, and blue-chip meme stock AMC. They follow not only Palantir, but perhaps the original source of the whole meme movement — Reddit, which reported for the first time as a public company Tuesday.

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