'Bad Omen' For Meme Stocks And The Retail Trading Boom? Here's What The Data Says

Social media meme stocks GameStop Corp. GME and AMC Entertainment Holdings Inc AMC took a beating this week, with GameStop on track to finish the week down 9% and AMC set to lose 20.9% in Friday afternoon trading.

DataTrek Research co-founder Nicholas Colas said this week there is an ominous sign the meme stock phenomenon may be dying a slow death.

Retail Trading Boom: DataTrek has been periodically tracking the boom in retail traders triggered during the pandemic in 2020 and 2021 by monitoring U.S. Google search volume for the keywords “invest” and “buy stock.” Colas said these basic search terms are a broad way to gauge marginal retail investor interest in the stock market.

The image below shows how search volume for those key phrases has changed since the beginning of 2020.

Colas said the search volume data clearly indicates the retail stock trading fad is completely over at this point, a “very bad omen” for AMC and GameStop. In fact, Google search volume is now back down to where it was before the pandemic started in early 2020.

In addition, search volumes are now down 75% from their peak levels during the initial short squeezes in AMC and GameStop back in January 2021.

Colas said meme stocks like AMC need new retail stock traders to join in the buying to support their stock prices else they could be headed for more volatility like they have experienced this week.

“Bubbles need fresh money, or they deflate. Quickly,” Colas wrote. “Every craze needs new adherents (i.e., not just the same crowd) to keep it relevant, and the Google chart shows those are in increasingly short supply.”

Related Link: Understanding The Pandemic Stock Trading Boom: Survey Profiles New Generation Of Investors

PMP Weighs In: Benzinga PreMarket Prep co-host Dennis Dick said a good story can carry a stock a long way, and some stocks can even become so hot that they become temporarily disconnected from the company’s underlying fundamentals.

“We have seen that in a number of meme stocks this year. Story can drive price in the short run but stocks almost always return back to their fundamental value in the long run,” Dick said.

The type of disconnect between share price and underlying value that AMC and GameStop have experienced in 2021 is certainly nothing new. Canadian cannabis stock Tilray Inc TLRY experienced a similar disconnect back in 2018 when a retail stock mania sent the stock skyrocketing up to $300. Today, Tilray is trading back down at around $13.90.

“As the stock price begins to fall, momentum traders who have been chasing the hot story will begin to exit. But if the stock trades at an extreme valuation, there may be very few traders willing to buy. This is what we are starting to see in many meme stocks today,” Dick said.
Benzinga's Take: If the story begins to get hot again, the stock prices of overvalued story stocks can always recover once again. But without any underlying fundamentals to support the valuation, these types of stocks need a constant stream of new buyers and an increasingly bullish story to generate fresh enthusiasm.

Photo: Dimitris Chapsoulas on Unsplash