Meme Stock Rally May Reverse, $1.3B Short Seller Losses

Recent meme stock rally faces potential sharp reversal, with significant premarket drops and over $1.3 billion in short seller losses.

By Barry Stearns

5/15, 09:33 EDT
AMC Entertainment Holdings, Inc.

Key Takeaway

  • Recent meme stock rally, including GameStop and AMC, faces potential reversal after significant gains, warns Wolfe Research.
  • Short sellers have incurred over $1.3 billion in losses this month due to the unexpected surge in meme stocks.
  • Economic slowdown and lower consumer savings contrast with previous meme stock frenzy conditions, suggesting a fleeting rally.

Meme Stock Rally Warning

Technical analysis from Wolfe Research’s Rob Ginsberg suggests the recent meme stock rally, characterized by significant surges in companies like GameStop and AMC, may be nearing a reversal. Ginsberg points to historical patterns where similar rallies were followed by sharp declines. This week, GameStop and AMC experienced drops of about 12% each in premarket trading, following gains of 179% and 135%, respectively, earlier in the week. Another stock, SunPower, also saw a 19% drop after a 60% surge. Ginsberg's analysis is based on an index tracking stocks with high short interest, which showed a rally into a lower high at long-term resistance.

Short Sellers Face Losses

The unexpected revival of meme stock trading has led to significant losses for short sellers, with more than $1.3 billion in mark-to-market losses this month. GameStop and AMC short sellers have faced the brunt of these losses, with GameStop shorts losing $1.24 billion and AMC shorts around $126 million, according to S3 Partners LLC. The losses have been particularly acute over the last two sessions, potentially forcing short sellers to exit their positions. The phenomenon of a short squeeze, where short sellers buy back shares to cover their positions, further exacerbates the price surge, contributing to the rally.

Critique and Market Volatility

Boaz Weinstein of Saba Capital Management has criticized the meme stock rally as speculative and disconnected from fundamental investing principles. Weinstein highlights the current market's volatility, driven by inflation, geopolitical tensions, and the upcoming U.S. presidential election. He warns of a potential credit crunch and increased market volatility, especially with the possibility of a Donald Trump presidency. Despite the significant price movements in meme stocks, Weinstein remains skeptical of their investment value, emphasizing the speculative nature of the rally.

Economic Context and Consumer Behavior

The meme stock rally unfolds against a backdrop of a softening economy and depleted consumer savings, contrasting sharply with the conditions during the 2021 frenzy. Economic indicators suggest slowed growth and a personal savings rate at a low 3.2%, down from 26% in early 2021. This economic environment, coupled with lower trading volumes and retail participation compared to 2021, suggests that the current meme stock mania may be more fleeting than its predecessor.

Street Views

  • Rob Ginsberg, Wolfe Research (Bearish on meme stocks):

    "As the past 3 sell signals highlight, we probably are a few days early before this group of stocks violently reverses, but we’re close."