Is Another Rally Coming for Meme Stocks?

It’s hard to believe that nearly half a year has passed since Reddit pulled off an unbelievable short squeeze that pushed major hedge funds out of short positions on GameStop. The intervening five months have seen retail stocks level off as the market returned to something resembling “normal,” but in the past few weeks so-called “meme stocks” have been jumping again.

This has been somewhat surprising for analysts who assumed that the meme stock market would cool off as the country’s economy reopened. However, retail investors don’t seem to be turning their attention away from the stock market. Why would they? Many retail investors likely made a tidy sum on the GameStop rally. Those who didn’t are probably eager to cash in on an unprecedented rally of their own.

Returning to Normal?

For the past 15 months, the discussion has been centered on “when things go back to normal.” More than ever, people in the world of stock trading are beginning to wonder if “normal” simply doesn’t exist anymore. Reddit is a new player in the market, and amateur investors don’t seem to be going away. In fact, the volume of single-stock call options for the hottest stocks is hitting January GameStop levels.

So, what is “normal” these days? Some analysts argue that we’re seeing the new normal and that the old days are a thing of the past.

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Retail Stocks Stay Main Focus of Reddit Investors

The main driving force behind retail investing currently is the single-stock call option. A call option allows a buyer to gain access to the option to buy a stock at a certain price for a set period of time.

For example, let’s say you want to buy GameStop shares and it’s early January 2021. You take out a single-stock call option to buy the stock at $10, and the call is good for a week. By the time that shares of GameStop are hitting around $200, you might be inclined to buy that call option you put out.

Parag Thatte, a leading analyst for Deutsche Bank, published a note Friday that explained how the high volume of call options on the market indicates high involvement in trading by retail investors. In the note, Thatte points out that the balance between call options and put options is at a fifteen-year low. In essence, people don’t want to short sell while Reddit is on the hunt for short squeezes.

“The increase has been led by single stock options and ETFs, while index call option volumes have remained largely flat to down. Call volumes have previously been a good indicator of retail involvement in the market,” Thatte writes.

The two hottest “meme” stocks trending on Wednesday, June 9, are Wendy’s, a fast-food chain, and Clover Health, a “preferred provider organization” that manages hospitals in parts of the US.

The Memes Are Changing

CNBC analyst Jim Cramer noted that this Wendy’s rally was a bit different from the AMC and GameStop stock situations. Wendy’s, Cramer explained during his show, is already a favorite of established investors. As Cramer puts it, this is evidence that this new breed of investor is a serious part of the modern stock landscape and branching out from the type of stocks that made the GameStop story headline-grabbing news.

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“If enough people with enough money start valuing stocks a different way, their new metrics matter, too, even if you think they’re absurd,” Cramer told viewers.

The Clover Health stock jump is a bit more in line with the kind of risky investments favored by r/WallStreetBets. Clover Health has only been publicly traded for a few months, and some firms had disclosed rather aggressive short-selling positions on the PPO. Retail investors on Reddit are now hungry for any short squeeze after the highly successful GameStop squeeze in January. If it worked once, why couldn’t it work again?

Original Meme Stocks Still Remain Popular

As of the time of this writing, retail investors are eyeing GameStop again. Today, the company will share its quarterly earnings report, and board member Ryan Cohen is expected to take the role of CEO during the event. Cohen, the founder of pet supply website Chewy, has shared a bold strategy to transform GameStop into a massive online presence for video game retail.

At the same time, the reopening economy bodes well for major retail players like AMC and Bed Bath and Beyond that were the focus of “meme stock” rallies earlier in the year. Reddit’s involvement in the market seems to be more than just a passing fad. Some experts are now saying that the recent interest in amateur trading is more likely to signal a paradigm shift in how individual stocks are valued, not a one-time gag that made a few investors rich.

So, what does the future of meme stocks look like? Jim Cramer conceded on his show Tuesday that, “[e]ventually the meme stocks will run out of steam, but for now I think they’re just getting started.”

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