Chief Investment Strategist, The Freeport Society
By now, you’ve undoubtedly seen this meme a couple dozen times…
Keith Gill, who goes by the screen name “Roaring Kitty,” posted this quickly scribbled drawing on X (formerly Twitter) on Sunday. He offered no explanation… in fact, no words at all.
Yet, it was enough to send the shares of GameStop (GME) up 74% Monday… and even more Tuesday before giving back some of the gains on Wednesday.
Battered movie theater chain AMC Entertainment Holdings (AMC) also got in on the action, rising 78% on Monday.
Here we go again. Meme-stock mania is back.
As utterly obnoxious as meme-stock culture is, with diamond-handed bros trading the “stonkmarket,” Gill is no dummy. He is a former CFA charterholder, and he correctly identified a monster short-squeeze opportunity in GameStop that, at least on paper, made him $50 million in profit.
How much of that he banked is not public information, and it’s widely assumed he ultimately sold for far less than that. Regardless, it was still likely an order of magnitude more than the average investor will ever make in a lifetime.
But hang on…
Gill didn’t mention GameStop in his Sunday post.
He didn’t mention any stock.
It’s literally just a scribbling of some guy playing video games.
If Gill is even a halfway good trader, he could be trading something other than GameStop stock. (Or is it “stonk?” I’m still learning to speak memestockese.)
So why did this sketch send GameStop and AMC stock soaring?
Because, frankly, this meme-stock mentality is absurd.
If I think you are going to react to a cryptic Roaring Kitty post by buying GameStop… and you think I’m going to react by doing the same… we’re going to trip over each other trying to buy the shares first, even if neither of us actually has an opinion on GameStop’s business fundamentals.
And for a heavily shorted stock like GameStop, that also means all the investors who banked on the stock’s decline must now buy the shares back.
When you short a stock, you borrow the shares from another investor first (your broker does this for you). Once you sell them, you’re legally obligated to give them back.
So, when a heavily shorted stock suddenly starts rising aggressively, it spurs the short sellers into panic buying. They’re willing to buy at any price.
This is a short squeeze, and it’s exactly what happened in 2021 all over again.
Great!
So what do we actually do about it?
Look, I’m never going to tell you not to trade. If you want to get in on GameStop or in the action of any other meme stock, by all means, be my guest. Trading meme stocks is fun, and if you time one good short squeeze right, it might be the only trade you ever need to make in your career.
But be smart about it… please.
Most of the meme-stock traders were late to the party. They bought after the shares had already run up, and then they suffered massive losses because they never had an exit strategy.
If you want to play this game, play it.
But keep your position sizes reasonable and know – before you enter it – how you intend to exit the trade.
Consider this the money you’d blow on a trip to Las Vegas. Don’t use the cash you need to pay your mortgage.
I smile whenever I see ordinary traders taking Wall Street to school, and I have no sympathy for the hedge funds that lose their shirts shorting. They are professionals and should have risk management in place. If they don’t, that’s on them.
But I have no edge in this game. Meme trading isn’t based on fundamentals or, for that matter, even on price action or other technical indicators. It’s based on social media buzz. That doesn’t make it “irrational,” per se. There is nothing irrational about you and I trying to out game each other by preemptively trying to buy first. But I have no good way to model it or to predict when the party’s over.
I prefer to trade where I have an edge and the odds are in my favor.
I recommend you do the same.
To life, liberty, and the pursuit of wealth.
P.S. Our TradeSmith friends do have the edge you can use to more responsibly trade meme stocks. They call it LikeFolio. It monitors social media for companies and brands… and it tracks stock tickers to spot unusual mention volume. It’s a highly effective way of finding the big meme stock plays or other opportunities before they materialize. To learn more about how they do this, and how it can help you take advantage of meme crazes and all the inbetweens, watch this video.