Meme stocks have surged in the last few weeks as retail investors shun pricier stocks for cheaper speculative names, but some experts worry that this could choke the current rally in broader markets.
At a time when the wider rally has made some stocks, especially in the tech space, too expensive, the return of meme stocks is offering retail investors a more affordable option to participate in 2023's market rebound and pocket big returns.
Roundhill's Meme index hit a one-year high last week and was last up 60% for 2023 so far, dwarfing gains of more than 18% recorded by the benchmark S&P 500.
The NYSE FANG+ index, housing megacap technology and growth stocks like Microsoft and Alphabet , has climbed 77% so far this year.
"Some of the retail animal spirits are coming back, but it's a little bit more complex than the first time around," said Thomas Hayes, managing member at Great Hill Capital.
"There's widespread panic-buying and catch-up trade from those who risk going into the year-end flat while the S&P is up 18%."
Retail investors poured in $1.27 billion per day on average into U.S. equities in July, closing in on the all-time record of $1.5 billion a day in March, Vanda Research said.
"What we have seen historically is that when short squeezes are happening in some of these zombie-like companies that are burning cash or in really beaten down names, that's usually more indicative of a sign of the end of the bull market as opposed to beginning," said Dennis Dick, market structure analyst at Triple D Trading.
The meme index consists of 25 equal-weighted U.S.-listed stocks with a combination of elevated social media activity and high short interest. It is rebalanced every two weeks.
Recent examples of rallies include a 33% jump in shares of cinema operator AMC Entertainment on Monday and a 40% rise in shares of troubled used-car retailer Carvana last Wednesday.
Net retail investor flows into Carvana hit their highest in over a year last week, before sliding a little on profit-taking, according to data by Vanda Research, while flows into AMC touched 11-month highs on Monday.
Shares of Carvana, which is also the top holding of Roundhill's meme index with a nearly 5% weighting, are up about 850% so far this year but are still far from their all-time highs hit during the meme stock mania of 2021.
About 28.1% of AMC's publicly available shares are under short position, according to data by analytics firm Ortex, while 55.2% of Carvana's free float shares are shorted.
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