2023 brought back ‘meme’ actions. It may seem like a minor joke, but more and more analysts are showing concern about how this phenomenon could put the market in trouble.
Meme shares are so called because they are shares of companies listed on the market whose price is driven by platforms that bring together thousands of small investors. Social networks also do their homework.
Social media comments attract potential small investors who might not otherwise buy stocks. Thanks to joint action, its value skyrockets.
This was the case not long ago in a case of meme shares, that of the GameStop video game store chain, which appreciated 600 percent in a few hours.
Up and down
The risk of meme stocks is that their prices can skyrocket, but also fall with the same magnitude and speed. They are highly risky due to their volatility, which is certainly not advisable for those who are not very risk tolerant.
For some, meme actions are a reflection of the democratization of investment in the stock market and the rise of social networks as a means of information. In recent years, factors such as the confinements generated by the pandemic encouraged online operations and exchanges among investors, driving this type of action in the markets.
Meme stocks also have other types of common characteristics: they are small-cap companies, but well known to investors, this last factor causes many users to be attracted to certain types of securities.
Meme actions lack fundamentals to support them and are very volatile, which is a determining characteristic of this type of issuer.
There are meme actions that tend to even be companies that had their heyday years or decades ago, which stimulates empathy with companies that are far from their best times.
For example, Nokia, Blackberry, Bed Bath & Beyond, Clean Energy or Microvisionare meme actions that investors currently consider for what they represented at the time.
The risk is that this type of action can end up registering bubbles that have exploded on several occasions, until now there has not been a major collapse, but it does not stop impacting small investors and representing a potential risk in the marketjust as it happened in 2021 and that Wall Street was about to collapse.
The bubble of 2023
In 2023, meme stocks are at it again: a bubble is underway that has many busy making profits, but others waiting to spot the first signs of what could be a disaster if the bubble bursts unexpectedly, as most bubbles do.
Examples exist and there are many: the American second-hand car sales company, Carvana, is not profitable to this day. In addition, it has just restructured its debt to maintain some financial strength and viability in a changing and risky economy. A small, very low-cap company and no influence on the market.
Despite all of the above, The station’s stock registers at the close of this Wednesday on the New York Stock Exchange a spectacular gain of 1,077.21 percentsomething that could be called a boom, if it weren’t for the type of station it is.
Another example, Coinbase, the cryptocurrency exchange platform, is immersed in a legal battle with the American market regulator (SEC), accused of operating as a broker without having a license to do so. Nevertheless, the price of its share registers a gain of 211.24 percent in the year, has more than doubled its 2023 asking price.
Many are the meme stations that seem to be having a stellar moment as measured by the momentum of their market action, but it might not be good news at heart. Its fragility is extreme, at any moment the memory of the overvaluation of 2021 in this type of issuers could return and end in the same disaster for small investors, such as those who suffered the consequences of the bubble burst two years ago, which today few remember.
It seems that these types of shares are actually listed on fictitious impulses or that they go ‘viral’ at a given moment, without any financial support, without those so-called “fundamentals” that have dominated the market for centuries and that are at the same time backed by figures, hard data and economic-financial sciences. Meme actions seem to defy these unwritten laws of the market.
Meme Stocks Are Inflating
What has happened in these recent months has not gone unnoticed by those who closely follow the beats of the market and scrutinize what happens in it every day.
The Bank of America (BofA) recently pointed out that retail positioning in equities is the most bullish since the end of 2021, especially in this type of issuer.
The bank points to the huge gap that, from its point of view, exists between individual and institutional investors. The former have filled their portfolio indiscriminately with shares, to the extent that they already represent 66 percent of their total assets.while the managers remain within the exchange, but under its rules and operating limits.
According to BofA specialists, there is a piece of information that should make those who operate in the equity markets reflect: according to the American Association of Individual Investors (AAII), bullish sentiment is six weeks above the historical average, which represents the longest streak since the summer of 2021again a similarity with those times, just two years ago.
This behavior generates caution for some analysts, due to the precedent of 2021, when the bullish euphoria took the market so high that the logical thing was to crash, and it happened. In those days, retailers rushed to buy meme stocks for fear of being left outbut it would have been preferable for many of them.
But what happens in these types of stations is also risky for the market in general. For example, analysts explain that these types of securities concentrate short positionsso its rise or eventual crash may end up turning against the S&P 500 and the stock market as a whole.
For several analysts who lived through the fall of 2021, the optimism of the market could hide a significant adjustment if the market continues to inflate, among other things because monetary policy continues to be transferred to the economy and will continue to slow it down, it could generate greater weakness in the future.
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