We Have Officially Entered a Crazed Market
Last Wednesday I wrote to you about how volatile, crazed, and confused the markets have become.
I shared with you one thing in particular to watch:
Meme stocks, specifically GameStop and AMC’s stock.
GameStop is up over 70% today and AMC is up over 40%.
Now remember the meme stock craze in 2021, investors on Reddit mainly led by a guy named Keith Gill who went by “DeepF***ingValue” on reddit and “RoaringKitty” on YouTube, all rallied together to drive the prices up on stocks that Wall Street took very large short positions in.
After a 3-year hiatus, he has returned and just his mere resurfacing somehow sent GameStop up over 100% at its peak and AMC up 40%…
Now, listen, I am all about the fun, high-risk idea of taking a shot on a meme stock. And I commend Keith Gill for being able to rally so many of his fellow traders to pull off what they did, going toe-to-toe with Wall Street elites back in 2021.
But we also need to remember that nothing about the underlying stocks, GME and AMC, warrants their share prices shooting to the moon.
As I’ve spoken about many times, we are still seeing a market where we can’t quite agree on what value is. Traditional valuation metrics aren’t holding water, stocks are soaring to multiyear highs on the resurfacing of one trader, and companies who report solid earnings are going down.
I feel comfortable saying that we have officially entered a crazed market.
Confusion has slowly but consistently been setting in for both the economy and the stock market.
We’re now seeing situations regularly where one economic data point indicates that we should be moving one direction, and another indicates the exact opposite. It’s like the markets and economy are mimicking the large political divide in our country — in which nobody can quite agree on common ground.
What Sent Shares Skyrocketing?
The meme-stock leader, Keith Gill, simply took to twitter and posted a sketch of a man leaning forward in a chair. Which is a popular meme among gamers that indicates things are getting serious.
That’s all.
And that alone was enough to send shares of GME and AMC up 100%!
When gaming memes on Twitter send underlying stocks up triple digits, I think we can agree that we’re not exactly in a traditional market anymore.
Art Hogan, the chief market strategist at B. Riley Wealth shared this about GME and AMC:
“There’s no fundamental change in any of the companies that are popularized in this phenomenon.”
In fact, in March, GameStop cut an unspecified number of jobs to reduce costs and reported lower fourth-quarter revenue. Meanwhile, AMC reported earnings last week that were roughly in line with expectations — certainly nothing warranting a 40% jump in share prices a week later.
Now, here’s the thing…
When the market is confusing like this, it makes sense to be cautious. I tend to lower my trading size and increase the cash in my portfolio.
But that’s only one side of the story…
The other reality is that volatility like this also creates opportunity. And, in fact, even trading with smaller size can allow us to target more significant windfalls than ever when movement really picks up.
So that’s exactly what I am looking for: Outsized opportunities in a chaotic market, while at the same time keeping my mostly long portfolio in place until the market actually proves otherwise.
Because things are certainly wild right now, but bullish conditions haven’t been broken and it’s important to let price lead the way even when we can all agree it doesn’t make sense.
That’s the paradox that most people missed from April 2020 – December 2021 as they sat on the sidelines while the stock market generated record wealth for those who allowed price to lead.
To your success,
— Nate Tucci
