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Why viral stocks are here to stay

After its roller coaster of a week, GameStop (GME) – which saw its valuation soar as retail investors bought up shares hoping to squeeze hedge funds that had shorted the stock – has come down to earth a bit. Shares sank on Monday and Tuesday, but are still up around 500% for the year.

And it looks like “meme stocks” — stocks that become virally popular on social media — are having another moment.

On Wednesday, Bloomberg reported a rally in retail-oriented stocks as millions of shares of penny stocks were traded by retail investors, often penny stocks that usually do not attract the interest of most investors. Such companies included Tyme Technologies (TYME), Healthier Choices Management (HCMC), Naked Brand (NAKD), Castor Maritime (CTRM), Corbus Pharmaceuticals (CRBP), AMC Entertainment (AMC), Koss (KOSS), and more.

While only some of these tickers saw large spikes in their stock prices, trading volume, which has in some cases eclipsed the amount of shares outstanding and float, suggests massive interest — and speculation.

One of the lessons from the bitcoin spikes in 2017 and 2020 as well as the trading of bankrupt Hertz and other companies last summer is the effect FOMO (fear of missing out) on gains has on investors.

At the core of the GameStop conversation was the idea that the stock market could be a get-rich-quick scheme if you pick the right stocks. Under the guise of analysis, putting money down on a stock is far less like gambling, the justification might go. To quote Zach Galifianakis’s character in “The Hangover,” “it’s not gambling if you know you’re gonna win.”

In the DataTrek Research newsletter, Nicholas Colas pointed out that options markets are not seeing recent volatility as a temporary thing, and that it may take some time until things calm down overall — a plus for those who trawl screeners for a stock on the move to latch onto.

But even if the overall market calms down to have fewer days with a 1% change, there will always be some volatility in some stocks to speculate on.

More people are in the market now

Even compared with the recent GameStop frenzy, the market was more volatile last year, Colas pointed out using the VIX (^VIX).

The VIX. While we've had a volatility spike, it's nothing like last year. (Yahoo Finance)
The VIX. While we've had a volatility spike, it's nothing like last year. (Yahoo Finance)

And while 2020’s volatility helped push millions of new investors into the market, aided by easy and commission-free trading, last week’s stories of hot stocks that let some traders pay off their student loansand perhaps stuck it to the man at the same time — provided a far greater boost. More people googled “how to buy stocks” than ever before.

We don’t know for sure why these new investors decided to jump into the market. It might be because the market is a great way to steadily grow your money over the long term, protecting against inflation and saving against retirement. But it also might be because they heard stories about a guy named “Roaring Kitty” turn $50,000 into many millions of dollars and other similar successes. If a huge crop of people are now in the market with expectations even somewhat aligned with that, expect the meme stocks to thrive going forward.

The past year saw a bear market so short many people probably didn’t even notice it. And it’s possible it made younger investors far more bullish than they otherwise might be, having seen a 30%-plus drop in the market backtrack to a fresh all-time high — in the midst of a horrible pandemic. It also may have made people reset their own standards for what “good” returns are — 8% annual is for chumps, etc. — pushing them into riskier and more speculative bets as they search for the tendies.


Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.