Spite is a powerful motivator for anyone, but it’s only recently been tapped by amateur investors on the stock market. Those investors, many of whom gather on social media sites like Reddit and chat apps like Discord, have created an immense amount of interest in what are known as “meme stocks”. Meme stocks include bizarre investments in retail companies like GameStop and AMC Theaters, struggling businesses that amateur investors have doubled down on.
In recent weeks, meme stocks have been fluctuating in price wildly. Now, GameStop and AMC’s shares are rallying once again, with users on the r/SuperStonk and r/WallStreetBets subreddits celebrating. However, the main thrust of celebratory posts isn’t that users are excited for their own gains as much as they’re excited that hedge fund short-sellers will be forced to eat currently unrealized losses.
What are Meme Stocks?
The meme stock saga was kicked off with a bang in January 2021, when users on the WSB subreddit noticed a particular vulnerability in the market positions of several major hedge funds. Retail investors noticed that the stock price of video game retailer GameStop was extremely low, and many hedge funds had taken out short positions on the company that was close to the stock price’s all-time low.
This left the hedge funds vulnerable to a short squeeze, as users on Reddit convinced enough retail investors to buy shares that it caused a huge rally in the stock’s price. By the end, several hedge funds were forced out of their short positions on GameStop, and some, like Melvin Capital, ate millions of dollars in losses.
Meme stocks across the board seem to be more motivated by spite than by anything else. Retail investors seem to resent that they aren’t taken seriously by establishment analysts even after the January short squeeze put meme stocks into national headlines. Their activities have completed upended the stock market, as normal patterns can’t be applied to the market when the added confusion of social media is added to the equation.
GameStop, AMC Rally (Again)
A chaotic July has seen shares of GameStop and AMC swinging wildly in value. As of the time of this writing, GameStop was up 2.6% on the day, to $190 per share. AMC, meanwhile, ended trading Tuesday at just over $43, making it one of the stock’s best days so far. Another meme favorite, Clover Health, also ended the day up just over one percent. Tuesday was a rough day for the markets across the board, except for the realm of meme stocks.
Investor sentiment Tuesday seemed to be a general fear that new lockdowns and economic slowdowns could be on the way due to the ongoing global medical situation. These fears don’t seem to have had any impact on the social media-centered retail traders on Reddit, though, who single-mindedly pursue one thing: short squeezes.
Redditors Resent Negative Reporting
The amateur investors on Reddit have also begun to express frustration with their depiction in market reports and news stories. “Banks, Disney, crypto, basically the whole market took fat losses today and it’s business as usual while we outperform most of the market and the only news story I see is how meme stocks are losing steam,” writes u/WigglesPhoenix.
The general sentiment on subreddits like Superstonk is that their investments are being derided by establishment analysts as a way to “bail out” hedge funds who have shorted stocks like GameStop and AMC and haven’t realized their losses yet. This leads to the accusations that negative stories against meme stocks are either uninformed at best or a coordinated market manipulation effort at worst.
Ironically, some establishment investors have accused WallStreetBets and Superstonk of market manipulation. In February, following the GameStop short squeeze, some Reddit users, like WSB’s Keith Gill, appeared before Congress to testify that they were not knowingly engineering a pump-and-dump scheme.
During the hearing, Gill told members of Congress that he simply “likes the stock,” referring to GameStop. His understated assertion that he merely “likes” the stock that Reddit has propelled to astronomical heights became a catchphrase on investing subreddits, with several posts including “I just like the stock” when talking about GameStop.
Motivated by Spite
It’s unlikely that meme stocks will lose value before hedge funds with short positions on them realize their losses. This will happen whenever the funds’ short positions are called, meaning they’ll have to buy back enough stocks to cover the amount they borrowed to bet against a given company.
Redditors seem to be mostly motivated by a desire to burn hedge funds for playing so fast and loose with naked shorts, which many users see as little more than an invitation for uncapped losses. As long as enough users on those subreddits agree to only sell at their desired price, and to continue to buy up shares when they falter, it seems unlikely that any short seller will get away without some losses on any meme stocks.