As of 12/27/2024
Indus: 42,992 -333.59 -0.8%
Trans: 16,031 -73.46 -0.5%
Utils: 987 -4.51 -0.5%
Nasdaq: 19,722 -298.33 -1.5%
S&P 500: 5,971 -66.75 -1.1%
|
YTD
+14.1%
+0.8%
+12.0%
+31.4%
+25.2%
|
 44,200 or 41,750 by 01/01/202516,700 or 15,500 by 01/15/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 |
As of 12/27/2024
Indus: 42,992 -333.59 -0.8%
Trans: 16,031 -73.46 -0.5%
Utils: 987 -4.51 -0.5%
Nasdaq: 19,722 -298.33 -1.5%
S&P 500: 5,971 -66.75 -1.1%
|
YTD
+14.1%
+0.8%
+12.0%
+31.4%
+25.2%
| |
|
44,200 or 41,750 by 01/01/202516,700 or 15,500 by 01/15/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 | ||
Initial release on 4/25/2023.
What are meme stocks and can you make money trading them? New research provides clues.
A meme stock is one that social media has grabbed onto as a promising stock with potential to make a large move. Chat rooms and forums will be talking about the stock's prospects, both good a bad, by real people, not multiple posts by a few people with fictitious names (as in a pump-and-dump situation). Participants will share their views about the stock. Opinions will vary and that's important. You want to avoid a stock that appears to have only one view, that of buying it because it's going to the moon (it's more likely to be a pump-and-dump). Varied opinions from multiple individuals is best. Some websites may have votes attached to the stock as a gauge of what the meme community thinks of the stock's prospects.
Let's begin with a model of a typical meme stock as provided by median numbers. A median number is the middle value in a sorted list of numbers. Half the samples will perform better and half worse. References to cells apply to the Excel spreadsheet which you can download here.
Here are important findings after doing research on nearly 150 meme stocks and 675 trades.
Can you improve your meme trades with this information? Yes. Having a model can help you understand the typical behavior of a meme stock, so you know what to expect. However, there is wide variation from one meme stock to another. As I mentioned, the above numbers use median values so half the stocks will perform better...or worse.
I didn't find a magic bullet which will help you decide when to buy or when to sell. For buying, I'd look for stocks which climb at least 50% off a minor low. That's the minimum I used to identify a meme move. You should be able to locate at least one other meme stock that has bottomed on the same day or others that bottom within a few days of each other. This may be due more to the general market than meme stocks. I didn't check for that.
After you buy the stock, monitor it daily or even intraday. Don't be too quick to sell. A typical trade will last two weeks (median 15 days). Use an elevator stop to exit the trade painlessly but only after it goes vertical in a strong up trend.
A meme stock is one that social media has grabbed onto as a promising stock to trade. It is not a pump-and-dump stock. Pump-and-dump stocks are often promoted by only a few people who say glowing things about its prospects. The stock will usually be a penny stock (one priced below $5 and often below a dollar) at the start with the intent of pumping up the price before the promoter(s) sell to unsuspecting buyers and disappear. Often the pump-and-dump stock will be of a shell company that has little value and few if any assets. The promoter has acquired the stock and is promoting it on social and electronic media (email), seeking a huge profit. Look at the stock chart. If it was valued for pennies recently, then be scared. If the company has no assets, then run away. If it trades over-the-counter (pink sheets), it's more likely to be fraudulent than one traded on the major exchanges.
The key difference between a pump-and-dump and a meme stock is that a meme stock may have fallen on hard times, but it has value. It has assets. Multiple real people are discussing the pros and cons of its outlook. With a meme stock, you don't have all glowing reviews by one person (perhaps controlling many social media accounts under fictitious names).
Those who follow meme stocks will say that Gamestop was the first meme stock. It started moving in 2019 (with a 62% gain in August), but it wasn't until early 2021 that a significant (four digit percentage) gain occurred. Several other stocks posted larger gains than Gamestop.
I scoured the Internet, beginning with the SEC (Securities and Exchange Commission) to find meme stocks for historical research. I wasn't looking to find the most recent promotions, but those that already made their move (such as Gamestop and AMC) so I could study their historical behavior.
I found 139 meme stocks but after filtering them for moves larger than 50%, only 98 qualified. The others are more recent stocks being promoted but haven't made a move or have a small following with smaller moves. I limited the stocks to January 1, 2019 (to get a baseline even though the meme movers started in 2021) to the current date (April 20, 2023).
I arbitrarily chose a minimum rise of 50% from low price to high using minor lows and minor highs. The search was conducted automatically by my computer after I programmed it what to look for.
Let's show an example to make the selection process clear using American Airlines stock (AAL).
I looked for all minor highs and all minor lows of sufficient width (not one-day price spikes). Then I paired them together, and looked for a move from low to high, with no intervening minor low, of more than 50%.
In this example, the move from minor low A to minor high B is a gain of 72%, from $10 to $17.20.
After I found a large rise, I looked for various features, such as how long it took for price to exceed the B high (at C) and how deep the low was between C and B (which was D).
The statistics I found helped determine if trading meme stocks is too risky to be a viable opportunity and what the profile of a successful meme stock might be.
Here's a list of what I found. You can find the data in an Excel spreadsheet accompanying this article for your viewing pleasure.
Let's show an example using the premier meme stock, Gamestop.
On the spreadsheet, I highlight this trade in yellow on row 283.
My computer found the lowest low (which I call the Trend Low) on January 8, 2021, at a low price of 4.27. That's the first minor low before the big spike. That spike is what I call the Trend High. The Trend High must be more than 50% above the Trend Low, which this is (at 2,728%). The 50% benchmark is an arbitrary number.
Price peaks at the Trend High on January 28, at a split adjusted price of 121. Notice that volume on this day is average for the prior month, that is, it fits within the range of 1/2 to twice the average volume during the month before the peak (or valley for the Trend Low). Volume is also average for the Trend Low.
After the Trend High, the stock plummeted, which is typical for meme stocks. Price reaches the After Peak Low on February 19, or 23 days after peaking. The run up to the peak from the Trend Low took 21 days, so the two trends are about equal in length.
The After Peak High occurred on March 10, as shown. This is the highest price the stock has achieved so far since the Trend High. Because we have found the After Peak High, we can locate the After Peak Low by finding the lowest low between the Trend High (January 28) and After Peak High (March 10). The After Peak Low happened on February 19.
How would you trade this?
Recall that Gamestop started making large moves in 2019 (August 15 to September 10) with a 62% rise, but it wasn't until the rise pictured in this chart that the stock made huge gains. That's about 1.5 years to wait.
How would you know to buy the stock at the Trend Low?
One answer is to check other meme stocks. If you find other stocks making new lows, then that might signal a buying opportunity. However, it's a risky opportunity. If you tune into the chat rooms and many are saying buy, then that's probably a better buy signal. To a stock trader, every new low might look like a buy point and picking the right one will be almost impossible.
Volume isn't a help. The Trend Low volume was normal. Short interest in the stock was high, but the SEC reported that it was over 90% from 2019 to 2021. Indeed, short interest was over 50% in 2012, 2015, 2016, and 2018.
So the answer as to when to buy is unknown.
What about selling? Here we have a tool that works (maybe not well, but it works). If you own the stock, you can use an elevator stop to sell. Once the uptrend is established with higher lows for 3 consecutive trading days, then place a stop a penny below the prior day's low. Raise it each day to a penny or two below the prior day's low. If you bought the stock before A, the price bar at A would have hit the elevator stop and taken you out.
However, if you bought the stock later, the stop at B would have cashed you out. Stop A is well below the peak but B is just one price bar from the peak. Using a stop in this case is a lot easier and probably more profitable than trying to time the sell by feel.
To improve success, start using an elevator stop AFTER both the high and low are above the prior day's high and low, respectively, for three consecutive price bars. It's best if there's minimal price overlap from bar to bar.
If you missed selling at or near the high, look at what happened to the stock. It's more than a year later and the stock has not recovered to its old high. Price is on the log scale, so what looks like a small drop is huge on the price scale. Just waiting a few days means you surrender a bundle. If a meme stock makes a lower high and a lower low, then sell immediately or use an elevator stop to cash you out near, but not at, the high.
Let's look at a second meme stock trade.
Point A is the Trend Low. From there, price rises to the Trend High, B, a gain of 966%.
Volume at A is normal (average) but at B it's high. I highlight the volume spike at E.
D is where price exceeds the Trend High for the first time. That means the lowest low between peaks B and D, is C. C is what I call the After Peak Low. The drop from B to C is a loss of 74%.
It took just nine price bars for the stock to drop that far. Ouch! That mean price fell 64% faster than it climbed.
Depending on when you bought the stock, an elevator stop would have either been a disaster or a blessing. The first stop would have cashed you out midway between A and E. You'd have made 17%, as measured from the Trend Low.
A second elevator stop would have taken you out at the white price bar to the left of E for a gain of 49%. After that, an elevator stop would have protected most of your profit by exiting the position the day after B, the Trend High, for a gain of 476%. That's well short of the 966% gain but we missed the peak by just a day.
For grins, I programmed my computer to use two elevator stops in each trade. A few trades did not use a stop because they reached a peak too quickly (usually in three price bars).
Using the second elevator stop, which assumes you entered the trade later than the first stop, the median stop hit a day before price peaked. The average stop location is farther away, at five days before the peak. See cells AB or AC 2 and 3.
If you bought at the Trend Low and sold at the Trend High, for a perfect trade, you'd make a median of 74% (cell F3) or an average of 125%. Using an elevator stop on the trade would take you our with a median gain of 32% or an average of 39% (AB2 or 3). If you ignored the first stop and used a second stop, you'd have captured a median gain of 45% and an average of 77% (calls AC2-3).
-- Thomas Bulkowski
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