Meme stocks are running again, and that\u2019s a bad sign for the stock market, one investment bank says. Maybe so, but if I\u2019m nitpicking, recent action doesn\u2019t look especially meme-y. I\u2019d characterize it more as a tactical trash bounce.<\/p>\n
\u201cReturn of the Memes Is a Red Flag,\u201d read the title of a July 11 technical-strategy note from BTIG. It pointed out that an index of meme stocks was up 10% in three days, compared with a decline of close to 2% for consumer staples. Over the past 18 months, when the three-day spread between the two has grown that wide, the
\n S&P 500
\n has lost an average of 1.5% over the following 20 days.<\/p>\n
A decline that small would perhaps be more interesting to day traders than long-term savers. But the note has a takeaway for everyone: A broadening out of this year\u2019s rally is \u201cencouraging,\u201d but a surge among low-quality stocks \u201coften is the tail end of the move.\u201d<\/p>\n
Market breadth is a hot topic. The S&P 500 index is up 17% year to date. Seven stocks combining for $11 trillion in market value contributed 73% of the index\u2019s first-half gains, according to BofA Securities. These are
\n Apple
\n (ticker: AAPL),
\n Microsoft
\n (MSFT),
\n Alphabet
\n (GOOGL),
\n Amazon.com
\n (AMZN),
\n Meta Platforms
\n (META),
\n Nvidia
\n (NVDA), and
\n Tesla
\n (TSLA). <\/p>\n
The Magnificent Seven, as some investors are calling these stocks, trade collectively at 40 times earnings and are skewing valuations higher for index investors. The S&P 500 as a whole goes for a lofty 20 times earnings. The index minus the Magnificent Seven\u2014the Frugal 493?\u2014trades at a more reasonable 15 times earnings.<\/p>\n
There\u2019s more to worry about than valuations. Second-quarter financial reports are just ahead, and the consensus has S&P 500 earnings falling 9% from a year ago, on flat revenue and shrinking margins. Meanwhile, data this past week showed inflation dropping to 3% in June from 4% in May, suggesting that the Federal Reserve could be close to the end of its interest-rate hiking cycle. But So if, on top of all that, the stock market is now sending in the clowns, maybe it\u2019s time to take some profits. But is this meme stock rally for real? <\/p>\n A meme on social media is an image, video, or piece of text that spreads virally with slight variations, often attempting humor. The Grumpy Cat meme, for example, consists of photos of cranky-looking felines with user-added captions, like \u201cI purred once. It was awful,\u201d or \u201cWhat doesn\u2019t kill you…will hopefully try again.\u201d<\/p>\n During the pandemic, traders armed with stimulus money, To be clear, there\u2019s nothing comic about a business making the best of selling videogames on disc through mall stores at a time when discs, stores, and malls are in decline. But there is something impish about traders sending shares of that business up 20 times in value in around two weeks, blowing up short sellers in the process. <\/p>\n That was early 2021, and before the end of the year, Roundhill Investments, which sells exchange-traded funds with niche themes, had launched the The fund, a poor performer since inception with meager assets, is what BTIG used to measure recent gains in its return-of-the-memes note. GameStop and AMC are holdings, but the initial irony there seems stale, and the shares weren\u2019t big gainers when the fund was running. Other holdings are odd fits. Does I screened the MEME index members during the three days BTIG examined and found that their gains were mostly driven by fallen momentum stocks with negative earnings last year, not what I would call memes. There\u2019s car seller Then I screened all U.S. stocks for top gainers over those same days, and examined the list for anything remotely amusing. Realtor Verdict: no meme rally\u2014just investors grabbing at low-quality stuff. It\u2019s unclear whether that signals trouble ahead for the broad market. <\/p>\n Barry Gill, head of investments at Write to <\/strong>Jack Hough at jack.hough@barrons.com. Follow him on Twitter<\/a> and subscribe to his Barron\u2019s Streetwise podcast.<\/p>\n<\/p><\/div>\n
\n Apollo Global Management\u2019s<\/span>
\n chief economist, Torsten Sl\u00f8k, points out that higher rates have a lagging effect on growth, and recent hikes are likely to weigh most heavily about a year from now. <\/p>\n
\n Robinhood
\n accounts, and access to Reddit chat forums began running up prices of certain assets that appeared to be selected for ironic purposes\u2014for example, the wrong company named Zoom, a parody cryptocurrency, and a holding company connected to the former Blockbuster video chain. Investors took to calling these punchline trades meme stocks, and chief among them were
\n GameStop
\n (GME) and
\n AMC Entertainment Holdings
\n (AMC). <\/p>\n
\n Roundhill Meme
\n ETF (MEME). It tracks an index that selects 25 stocks automatically. Since there\u2019s no way to screen for irony, the index uses two other factors to gauge the potential for short squeezes: a flurry of mentions on social media and heavy short-selling as a percentage of available shares. <\/p>\n
\n Delta Air Lines
\n (DAL), one of the stronger legacy carriers and a solid cash generator, know that it\u2019s a meme stock? What\u2019s ironic about
\n Carnival
\n (CCL), the cruise operator?
\n Walgreens Boots Alliance
\n (WBA) is decidedly unfunny, even by the standards of drug chains. Its shares are sleepy, too. <\/p>\n
\n Carvana
\n (CVNA); bitcoin miner
\n Riot Platforms
\n (RIOT); artificial-intelligence-driven lending platform
\n Upstart Holdings
\n (UPST); two electric-vehicle concerns,
\n Rivian Automotive
\n (RIVN) and
\n Lucid Group
\n (LCID); and two providers of financial services to the crypto and momentum set,
\n Coinbase Global
\n (COIN) and
\n Robinhood Markets
\n (HOOD). <\/p>\n
\n Redfin
\n (RDFN) and streamer
\n FuboTV
\n (FUBO), each up about 30%, are fallen momentum stocks with elevated short selling, but no ironic twist. Not far behind them is
\n WD-40
\n (WDFC), a prosperous lubricant company whose sales have been picking up, and that\u2019s about as serious as it gets. <\/p>\n
\n UBS Asset Management,<\/span>
\n agrees that more pressure from the recent rise in interest rates is coming. \u201cThat\u2019s more of a 2024 event than it is a 2023 event,\u201d he says. Investors likely have too much money now in U.S. growth stocks and long, safe bonds, and they could do with a bit more cash. \u201cIt\u2019s a long time since you\u2019ve had five-plus percent rates on money-market funds,\u201d Gill says. Even Grumpy Cat would approve. <\/p>\n