May 16, 2024

They’re Back!

By Peter Bower

The meme traders are back! Before consigning them to a lunatic fringe, their activity does point to a stock market full of liquidity and animal spirits. If taken too far, this activity may indicate froth born of irrational exuberance. The Bull and his partners feel that we are still quite a way from being able to draw that conclusion. The meme traders see opportunity and are jumping on it.

Meme trading can take many forms, but it started with identifying stocks with large short positions and then creating a buying frenzy, forcing prices higher. The goal is to create this violent thrust higher, then sell out at much higher prices to the short sellers that need to cover their positions.

Remember short selling is a process of borrowing stock to sell with the hope that it can be bought back at a lower price to return the original stock or cover the position. The short seller makes the difference between what the borrowed stock was sold for and the price that it could be purchased back to replace the original. If buying back the sold stock costs more than was received from the original sale, then a loss is incurred on that strategy. Short sellers will only take so much loss before they must buy back and close out the position.

Yes, both the meme traders and the short sellers are gambling, not investing, but that has always been a part of healthy markets. No one has to participate in this activity. There are some great long-term opportunities, and the Bull and his partners are finding plenty. Let the meme traders and short sellers have their fun. Remain focused on activity that makes real money over time and stay steady my friends.

The Lonely Bull