As of 04/24/2024   Indus: 38,461 -42.77 -0.1%     Trans: 15,078 -358.61 -2.3%     Utils: 893 +6.79 +0.8%     Nasdaq: 15,713 +16.11 +0.1%     S&P 500: 5,072 +1.08 +0.0%	YTD  +2.0%   -5.2%    +1.3%    +4.7%    +6.3%	Targets    Overview: 04/12/2024     39,800 or 37,150 by 05/01/2024   16,200 or 15,000 by 05/01/2024   885 or 850 by 05/01/2024   16,700 or 15,800 by 05/01/2024   5,250 or 5,025 by 05/01/2024
Chart Pattern Indicator: on 4/23/24

As of 04/24/2024   Indus: 38,461 -42.77 -0.1%     Trans: 15,078 -358.61 -2.3%     Utils: 893 +6.79 +0.8%     Nasdaq: 15,713 +16.11 +0.1%     S&P 500: 5,072 +1.08 +0.0%	YTD  +2.0%   -5.2%    +1.3%    +4.7%    +6.3%
Targets    Overview: 04/12/2024     39,800 or 37,150 by 05/01/2024   16,200 or 15,000 by 05/01/2024   885 or 850 by 05/01/2024   16,700 or 15,800 by 05/01/2024   5,250 or 5,025 by 05/01/2024
Chart Pattern Indicator: on 4/23/24

Bulkowski on Meme Stocks

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.

Meme Stocks: Results Summary

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.

• The gain is 74% (measured from Trend Low [the minor low where the rise begins] to the Trend High [the minor high where the rise ends]). See cell F3.
• The rise takes 15 days before the stock peaks at the Trend High. See cell R3.
• Volume at the Trend Low is average (cell G3). Volume at the Trend High is high (more than double the 31-day average) 51% of the time. Cells I3 and H3.
• After price peaks at the Trend High, it drops for 15 days, mirroring the time it took to make the rise. Cell T3.
• After the peak, price drops 35% or slightly less than half of what it gained. Cell U3.
• It takes 25 days to post a new high above the Trend High. Cell X3.
• Those stocks which never make a new high peak about 20% below the Trend High. Cell Z3.

Here are important findings after doing research on nearly 150 meme stocks and 675 trades.

• If you miss selling at the trend high, you have a 74% chance of seeing price exceed the trend high (eventually). Cell X4. It'll make a new high in a month (median) to two months (average). Cells X2-3. Of course, some like Bed, Bath, and Beyond (BBBY) will go bankrupt (which it did on 4/23/23).
• Trading volume is not a good buy indicator. See cells G2 to 4.
• At the trend high, volume was high (at least twice the 1-month average 51% of the time) or normal (47% of the time). See cells H2-4. Volume on the sell day may be a useful trading indicator but probably isn't.
• The rise to the peak and fall thereafter, was fast, happening in 15 days. See cells R3 and T3.
• For both the Trend Low and Trend High days, multiple meme stocks will bottom or peak, respectively, as a group. If you follow multiple meme stocks, see if others are either making a minor low or minor high at or near the same time as the stock you wish to trade. You'll find at least one other meme stock that shares a Trend Low 69% of the time or a Trend High 65% of the time (but you may have to scour a hundred stocks to find one). Cells V3 and W3.

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.

Meme Stocks: Background

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.

Meme Stocks: Methodology

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.

Meme Stocks: Findings

Here's a list of what I found. You can find the data in an Excel spreadsheet accompanying this article for your viewing pleasure.

• The median rise was 74% (measured minor low to minor high) with an average of 125%. I limited the minimum qualifying rise to 50%. The biggest gain was 4,420%, scored by Koss in January 2021. On the spreadsheet, you find these numbers is cells F2 to F5.
• Volume at the trend low (point A in the prior figure) was normal (average) 72% of the time. It was low (half the 31-day average) 14% of the time and high (twice the 31-day average) 14% of the time. In other words, trading volume is not a good buy indicator. See cells G2 to 4.
• At the trend high, volume was low 2% of the time and normal 51% of the time, and high 47% of the time. See cells H2-4, I2-4. Volume on the sell day may be a useful trading indicator. I only looked at the Trend High day versus the prior 31-day average. In at least one case, volume was higher the day before price peaked. Regardless, excessive volume seems to hint that price is at or near the peak.
• The median hold time was about two weeks (15 days), from trend low to trend high (the rise from A to B on the figure). The average rise took 17 days with ten samples taking just two days and one lasting 66 days. See cells R2-5.
• To understand the power of the move, I computed the percentage gain per day. It ranged from a minimum of 1% to a high of 316% with a median of 6% and an average of 10%. See cells S2-5.
• After a stock peaks, how long before you lose a significant amount of profit? The move down after price peaks is equal to the time it took to reach the peak. In chart patterns, I've found that price drops twice as fast as it rises. With meme stocks, the rise equals the fall. See cells AA2 to 7. On the spreadsheet, a value in column AA below 100% means price climbed quicker than it fell. To find this, I calculated the ratio of days to the trend high from the preceding minor low (trend low) to the drop from the trend high to the next minor low. In the prior chart, that's the move from A to B compared to B to D. I found D by knowing that price exceeded the B high at C. The lowest price between B and C was D. If you failed to sell when price climbed from A to B, you could have turned a gain into a loss when price hit D.
• Column V provided interesting results. Sort the spreadsheet by column B, the trend low. When I did that I found that 69% of the trades occurred in more than one stock. In other words, memers were buying multiple stocks at the same time. In one case, 19 meme stocks shared the same buy date, a date the stock made a minor low which preceded the big run up. As exciting as this sounds, it's not useful. We don't know when people buy, so we can't check to see if they are buying multiple meme stocks on the same day. My only suggestion is to check the charts and see if multiple meme stocks are making a minor low at the same time. Volume isn't a clue to this behavior, either. In the 19 stock run cited earlier, only two stocks showed high volume. The remainder were normal (13 of them) or low (4) volume.
• Sorting by column C, the trend high, shows a long run on 1/27/2021, where 17 stocks peaked on the same day. Notice that volume for each stock is high in all cases. To know when to sell, look for other meme stocks forming a peak on volume that's twice (or higher) the 1-month average after gaining 50% or more from the trend start (the prior minor low).
• Column X tells how long it takes a stock to move from B to C in the prior chart. It's the time to recover to a new high. However, 74% made a new high (cell X4) and that took a median of 25 days or almost a month (the average is twice that, 64 days, or more than two months). If you miss selling at the trend high, you have a 74% chance of seeing price exceed the trend high. An easy way to sell is to place a sell stop at the price of the old high. When price reaches the old high, your stock sells automatically. You can also use what I call an elevator stop to take you out.
• Column Z says that for the 26% that failed to reach the trend high (74% made it [cell X4], 26% didn't), they missed the peak by a median of 20% and an average of 24%. One stock (SI) is 90% below the peak so far.

Meme Stocks: Gamestop Example

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.

Meme Stocks: Trading Gamestop

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.

Meme Stocks: AMC Example

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.

Meme Stocks: Elevator Stops

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

See Also

• Download the research data here.
• Elevator stop.
• Stop placement and other types of stops.
• Best buy days. Which day of the week is best to buy or sell?
• Best buy months. Can buying at the end of the worst performing month and selling at the best performing be profitable?
• 10-baggers. Find 10-baggers using fundamental analysis.
• Hold on. How long to you need to hold onto a stock? Find out...
• The nature of bottoms.
• Finding the Market Bottom

 

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