Thursday, June 20, 2024

Deloitte: Poland enters the phase of economic expansion

The divergence of economic moods in Poland...

Two Years On: War in Ukraine and Its Global Impact

On February 24, 2022, a full-scale Russian...

May Frenzy: Investors Flock to Social Media Stocks Amidst New Wave of Speculation

INVESTINGMay Frenzy: Investors Flock to Social Media Stocks Amidst New Wave of Speculation

The May frenzy in the stock market surrounding social media-related companies has sparked investor interest, as they join the wave of speculation seeking large and quick profits.

In such situations, investors’ decisions are not based on fundamental business analysis but are driven by emotions. The first two days of the second half of May will likely go down in history as the second surge of meme stocks, propelled by the return of the user “RoaringKitty” on platform X.

“The meme stock fever that fueled Wall Street’s emotions in 2021 has once again hit the stock market, and we are witnessing a mirror situation related to GameStop,” Tymoteusz Turski, an equity market analyst at XTB, told MarketNews24.

The alleged return of the legendary user @RoaringKitty, the icon behind the speculative attacks of the WallStreetBets group, after three years of inactivity, caused GameStop and AMC stocks to gain 180% and 135%, respectively, in just two days. A mysterious tweet on platform X by Keith Gill (the real name of @RoaringKitty) has raised expectations for a return to the euphoria of speculators within the WallStreetBets group, which drove several stocks to gains of several hundred percent three years ago.

WallStreetBets, or WSB, is a subgroup on Reddit where participants discuss their methods of trading stocks and options. What sets this group apart is its colorful and vulgar jargon combined with aggressive trading strategies, appealing to the tastes of the younger generation of the 21st century. In 2021, it was this group that started the trend of aggressively buying selected stocks, often financially struggling companies, resulting in astronomical market gains. The trend later extended to the cryptocurrency market, an ideal place for adrenaline-seeking novice investors to risk their life savings.

What effect can a sudden increase in interest in a company on the brink of bankruptcy and long seen as a lost asset have? Naturally, it results in significant price increases. The crux of the matter is that with substantial short positions held by funds (which profit from declines), higher price increases force many of them to close these positions, further driving up stock prices (covering a short position involves repurchasing previously sold shares).

This creates a snowball effect known as a short squeeze. In 2021 and now, it is responsible for the astronomical price increases of selected stocks, with the scale depending on the percentage of shares sold short and the level of interest from small investors in the stock.

“We see a short squeeze when investment funds take short positions on certain assets and are forced to close them due to a dynamic price increase,” explains the XTB expert. “They then have to buy back the shares they previously sold, which increases demand. If there is a sufficiently large group of investors who previously bought these shares and are not willing to sell, the additional demand further boosts stock prices. This forces more funds to close short positions, increasing demand again.”

Funds lost nearly $20 billion in 2021 due to WSB action. This time, after two days, losses amount to $3 billion.

It’s worth recalling that in 2021, we observed a short squeeze on CD Projekt shares, with Elon Musk himself defending the stock’s price.

Emotions often determine market sentiment in the short term, but pragmatic aspects eventually take over. The period of heightened interest in meme stocks may last as long as retail investor engagement remains high or the fundamental situation changes. Until then, we can expect significant emotions on Wall Street from both emotionally-driven retail investors and calculation-focused funds.

“This is a high volatility situation in the stock market that can change very quickly,” summarizes T.Turski from XTB. “These situations often lead to stock trading being suspended.”

After a two-day surge in small meme stocks, it was time for a correction or the bursting of this small bubble. Stocks like AMC and GameStop lost up to one-third of their value, although previous days had seen triple-digit gains.

Check out our other content
Related Articles
The Latest Articles