Meme stocks are a ‘self-containing loop,’ market strategist explains

Retail traders are back at it again — using a signature playbook to push meme stocks and other assets higher.

“The retail is back,” Interactive Brokers chief strategist Steve Sosnick told Yahoo Finance live on Monday.

“The meme stocks I guess are the perfect tell for this. To a certain extent crypto coming back [Bitcoin] (BTC-USD) testing $25,000 is another tell.”

“A lot of people are using the 2020, 2021 playbook over again,” said Sosnick.

“It was a spectacular playbook for that period of time. But the rules of the game seem to be changing.”

Despite Fed concerns, uncertainty out of China, and questioning whether the markets are in a bear market rally, stocks like GameStop (GME), AMC (AMC) and Bed Bath and Beyond (BBBY) have been soaring recently. New names like Chinese tech firm AMTD Digital (HKD) have also surged. HKD and other stocks have acted more like swing trades.

Retail traders poured into names like GameStop and AMC in early 2021. They became the flagship meme stocks amid a period of high liquidity in the markets and looser monetary policy. But since then, the Federal Reserve has been hiking rates amid soaring inflation.

The markets went into bear market territory earlier this year, but have since come off their mid-June lows.

“For now the playbook is working,” said Sosnick. “But I have to wonder if using that same investment playbook that worked for you which includes ‘Don’t fight the Fed’ – which in that period of time the Fed was your friend — now the Fed is kind of a headwind.”

Sosnick notes the meme stock rally nowadays has a “less organic nature to it.”

“The initial meme stock craze you had people coming in who never invested before putting money into these stocks and investing. Now it seems to be the same cast of characters chasing the same list of names with a couple of new exceptions every so often,” said Sosnick.

“That becomes more of a self contained loop,” he added. “The meme stock trading works great if you’re early. It works terrible if you’re late.”

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Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre

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