The Meme Stock Rally: A Guide to Navigating Market Volatility

The meme stock rally can be a wild ride, but understanding the basics is key to navigating its ups and downs.

In 2020, GameStop's stock price skyrocketed from $17 to $483 in a matter of weeks, thanks to a surge in retail investor interest. This phenomenon was dubbed the "meme stock rally."

To participate in the meme stock rally, you'll need to be aware of the key players involved, such as retail investors, institutional investors, and social media platforms. These groups can have a significant impact on the market volatility of meme stocks.

The retail investor community has been a driving force behind the meme stock rally, with many individuals using social media platforms to share and discuss investment ideas.

Check this out: What Is a Meme Stock Rally

A meme stock is a company's shares that have gained viral popularity due to heightened social sentiment online. This social sentiment is usually fueled by discussions on social media platforms, particularly on websites like Reddit and posts on platforms like X (formerly Twitter) and Facebook.

Meme stock communities are often made up of independent individuals, each with their own investment views and preferences. They don't always coordinate their efforts, but their collective actions can lead to short squeezes in heavily shorted names.

These communities have developed a unique lingo, which includes terms like "apes" (members of the meme stock community) and "BTFD" (buy the f***ing dip). They also use emojis to denote these terms online.

Here are some key characteristics of meme stocks:

Despite the risks, some meme stock enthusiasts believe that these stocks can bring extraordinary profits, earning them the nickname "tendies" (profits made in meme stocks). However, others may view these stocks as overvalued, especially if they don't meet fundamental technical analysis standards.

GameStop became a stock market sensation during the pandemic, with its stock price closing at $28.64 on August 31, 2022, and a 52-week range of $19.40 - $63.92. The company has struggled to turn things around, losing $400 million from April 2021 to April 2022, and having just over $1 billion on hand as a runway.

The GameStop 4-for-1 stock split and the introduction of the NFT marketplace haven't helped the company like management thought it would, with the NFT marketplace generating less than $4,000 in daily revenue. The company has aspirations of becoming the “Amazon of gaming,” but it's difficult to see this playing out.

GameStop is widely regarded as the first meme stock, whose price rose as much as 100 times over several months as its meme community crafted a short squeeze. The stock was heavily shorted by hedge funds, which ultimately led to a massive short squeeze.

A key factor in the GameStop short squeeze was the influence of Keith Gill, aka "Roaring Kitty", who posted a viral video laying out the case for why shares of GameStop could soar from $5 to $50 per share in August 2020. The video helped to spark a frenzy of interest in the stock, which ultimately led to a massive short squeeze.

The GameStop short squeeze had significant consequences, with a handful of hedge funds forced to shut down due to heavy losses. The incident also highlighted the power of social media to drive investor behavior and the potential for meme stocks to create significant price movements.

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Here are some key statistics about GameStop's short squeeze:

The GameStop short squeeze was a significant event in the world of finance, highlighting the potential for meme stocks to create significant price movements and the power of social media to drive investor behavior.

Buying meme stocks without doing your research is a recipe for disaster. The article highlights the risks of buying stocks just because they're rallying, citing AMC as an example.

Shares of AMC have been trading sideways for weeks, and their third-quarter results didn't exactly impress, with sales declining and a loss of 4 cents per share.

The company's debt is a major concern, with a total of $4.5 billion in debt and a refinanced loan of $1.6 billion. This can put a significant strain on the company's finances.

Investor's Business Daily recommends paying attention to the market and managing risk when investing in meme stocks like AMC. Their IBD Ratings are well below ideal levels, with a Composite Rating of just 20.

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Short selling is a high-risk strategy where investors sell shares they don't own, hoping to buy them back at a lower price.

A short seller must borrow shares from someone who owns them, which can become a problem if the stock becomes hard to borrow, like with meme stocks. This can happen when a large proportion of the company's outstanding shares have been sold short.

Short selling involves selling shares on margin, which means the investor is using borrowed money to make the trade. This can lead to significant losses if the stock price rises.

As a short seller's losses mount, they'll receive margin calls from their broker, demanding funds to cover the losses. This can be a stressful experience, especially if the short seller doesn't have enough money to cover the losses.

A short squeeze can occur when many short sellers are forced to cover their positions at once, driving the stock price up even further. This can be a nightmare for short sellers who are trying to cut their losses.

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Buying stocks without doing your research is a recipe for disaster. It's like trying to navigate through a storm without a compass, you'll just end up lost and possibly wiped out.

Buying stocks just because they're popular or rallying is a poor strategy. It's better to bring a time-tested method for stock picking and search for buy points in proper bases.

The risks involved can be seen in the chart of AMC, which has been trading along the 50-day moving average for weeks, going sideways. This lack of direction can be a warning sign.

Third-quarter results for AMC showed a decline in sales, from $1.4 billion to $1.3 billion, and a loss of 4 cents per share. This is not exactly what you want to see in a company's financials.

The debt load of AMC is also a concern, with $4.5 billion in debt and a refinancing that extended the maturity of some of that debt. This can be a heavy burden on a company's finances.

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The IBD Ratings for AMC are well below ideal levels, with a Composite Rating of just 20. This is a sign that the stock may not be as strong as it seems.

Investing in meme stocks can be particularly volatile, with wild swings in price. AMC shares have gone from a split-adjusted closing price of 11.49 on Dec. 31, 2020, to an all-time high of 393.65 on June 2, 2021, a gain of 3,326%. But the stock has crashed since then.

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Roundhill Investments offers a meme stock-focused ETF called MEME, which features an equal-weighted portfolio of 25 stocks based on social media popularity and market sentiment.

Eligible securities are initially given a social media activity score, with consideration paid to their short interest, and the top 25 firms are included in the portfolio, which is re-examined and rebalanced twice a month.

Single stock ETFs have also been introduced, providing leveraged long or short positions on a single stock, and some of these include meme stocks like Tesla and NVIDIA.

Stock ETFs have become increasingly popular in recent years, offering a convenient way to invest in a variety of assets with a single trade.

A meme stock-focused ETF, MEME, was launched in December 2021 by Roundhill Investments, featuring an equal-weighted portfolio of 25 stocks based on social media popularity and market sentiment.

Single stock ETFs have also been introduced, providing leveraged long or short positions on a single stock, including some popular meme stocks like Tesla and NVIDIA.

These ETFs can be a great option for investors looking to diversify their portfolio or take a more active approach to investing, but it's essential to do your research and understand the fees and risks involved.

The MEME ETF, for example, rebalances its portfolio twice a month, which can be beneficial for investors who want to stay up-to-date with market trends.

Only a small number of single stock ETFs have been approved for trading so far, but they can offer a unique way to invest in specific stocks with a high degree of leverage.

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Investments can be actual stocks listed on exchanges and available for trade, like meme stocks.

Critics argue that the price performance and appeal of some investments have little to do with their fundamentals and much to do with their entertainment value as speculative playthings.

Meme stocks are often compared to casino games in terms of their speculative nature.

Their entertainment value can lead people to invest in them without a thorough understanding of their underlying fundamentals.

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AMC Entertainment Holdings, Inc. is a prime example of a company that benefited from the meme stock rally, with its market value shooting up to almost $27 billion in mid-2021.

The company's market cap dropped to $4.40 billion by September 1, 2022, but it's still a significant increase from its $450 million market cap at the end of 2020. The stock closed at $9.12 on August 31, 2022, and had a 52-week range of $8.68 to $52.79.

AMC's financial results for the second quarter of 2022 showed revenue of $1.17 billion, more than double the previous year's ticket sales, but the company still had a net loss of $121.6 million.

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AMC Entertainment Holdings, Inc.

The market value of AMC shot up to almost $27 billion in mid-2021, a staggering increase from its market cap of roughly $450 million at the end of 2020.

AMC's stock price fluctuated wildly, closing at $9.12 on August 31 and ranging from $8.68 to $52.79 over the past year.

The company's recent financial results show revenue has grown to $1.17 billion, with ticket sales more than doubling compared to the previous year.

Despite this growth, AMC still reported a net loss of $121.6 million in the second quarter of 2022.

In a bold move, AMC announced a new share class called AMC Preferred Equity, or APEAPE, which is a nod to the company's enthusiastic meme stock investors.

This new share class could potentially raise money for the company to help it rebuild post-pandemic.

The market value of AMC has since dropped to $4.40 billion as of September 1, 2022, a significant decrease from its peak.

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Bed Bath & Beyond is a retail company that's been making headlines lately. The company's stock price has been on a wild ride, with a 314% increase in August 2022 before crashing back down.

The SEC even had to halt trading for the stock at one point due to its volatility. On August 31, the company closed at $9.53 with a one-year range of $4.38 - $30.06.

Bed Bath & Beyond reported a $358 million loss and $3.3 billion in debt, which has likely contributed to the decline in investor confidence. The company plans to close about 150 lower-producing stores and cut 20% of its corporate and supply chain workforce.

The company has obtained more than $500 million in new financing commitments and plans to go through a merchandise overhaul to attract customers and increase sales. Unfortunately, the shares fell 21% on August 31 after the announcements were made.

The company's future is concerning, but it's not giving up yet. Bed Bath & Beyond is making significant changes to attempt to revive the business and regain the trust of investors, customers, and suppliers.

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