Last week, I posted a blog identifying a number of signs that investors are very much in a “risk-on” if not speculative mood. Do you remember the meme stock mania in 2020 and 2021 when the price of Game Stop stock went from $1.50 to $81 in just a few weeks? Well, meme stocks are back. The price of Krispy Kreme stock rose 60% in two days (7/21 and 7/22) only to decline 11% on the 23rd. Even more dramatic, the price of GOPRO stock rose 130% on those same two days although it fell 32% on the following day. Similarly, Kohl’s Corp. stock rose 38% before falling 15%, Beyond Meat rose 35% before falling 10%, and Open Door rose 121% to a peak of $4.86 before settling back to $2.29. The magnitude of these swings is truly extraordinary, and I am almost hesitant to quote specific stock prices because they are changing so fast.
This frenzied activity is being driven by day traders who are plugged into social media although it is likely that some hedge funds and algorithmic traders have joined the party. Bloomberg reported that the call option volume on 7/22 for Krispy Kreme was 71 times the average daily volume over the past four years. Bloomberg also pointed out that traders are scouring the list of low priced stocks with high short interest in order to identify those that could be the subject of a short squeeze. One measure of the extent of the frenzy is the number of meme stock stories across a broad range of media as shown below:
A record high in the equity weighting of the average investor, record levels of margin debt, huge flows into leveraged and single stock leveraged ETFs, concentration of the S&P 500 in ten stocks, narrow credit spreads, and now, a resurgence of meme stock trading, are all causing the hair on the back of my neck to stand up. I may well be a dinosaur who just doesn’t get it, so I won’t attempt to guess how long this can last. However, to quote one of Warren Buffet’s most famous lines, “Only when the tide goes out do you discover who’s been swimming naked.”