When to Get in the Meme Stock Action

by | Aug 18, 2022 | Market Lessons

Howdy, traders. It’s Bryce here today.

Retail traders are back early from their summer vacays and they’re heating up the meme stock frenzy. 

Traders who’ve been around since the pandemic lockdowns know this phenomenon well. 

It only takes one to get the rest of them activated. Before you know it, you’ve got a hot sector on your hands. 

That’s what we’re in now. But there’s something different about this hot sector that makes it a bit tricky to trade. 

Let’s get into why meme stocks move differently and how you can find the best trades… 

Why Meme Stocks are Different from Other Sectors

Meme stocks move a little differently from other hot sectors. It’s one of those cases where you have to know how to break your own rules

The biggest difference between a meme stock and other momentum stocks is that, quite often, they don’t come with a meaningful catalyst.

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With momentum stocks, a meaningful catalyst includes a strong press release (i.e. news of a patent approval, new leadership coming onboard, a new partnership with another company), a favorable earnings report, or a recent IPO. 

Meme stocks require none of the above to boost their popularity. They’re a pure emblem of mob psychology. And that’s what makes them wildly awesome. So what should you look for? Here are a few things:

  • A former runner. Most meme stocks have run before, during the original craze of 2020. Think AMC Entertainment Holdings Inc. (NYSE: AMC), GameStop Corp. (NYSE: GME), and Bed Bath & Beyond Inc. (NASDAQ: BBBY). They’re O.G.s by now.
    • A high short interest. The thing that makes them run to the moon is shorts trying to guess the top and longs jumping in en masse as they’re alerted by different trading chat rooms.
    • A relatively low float. This just depends on how much volume can be generated by chat rooms. Many meme stocks don’t meet the small-cap definition of low float, but they’re in the mid-range. AMC has over 500 Million, GME has over 300 Million, and BBBY has 80 million. 
    • A breakout on high volume is an absolute must. 
  • Sympathy plays. Traders who gotta have that smaller stock float will jump into meme stock sympathy plays like Blue Apron Holdings Inc. (NYSE: APRN), Kirkland’s Inc. (NASDAQ: KIRK), and Vinco Ventures Inc. (NASDAQ: BBIG)

I actually traded Bed Bath & Beyond Inc. (NASDAQ: BBBY) yesterday. Here’s what my trading plan looked like … I took a very small long position at $24.97, risking the low of the day set in the morning at about $24.50.

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I figured it would either stop me out or take me on a short squeeze ride. It was a pretty choppy day. And then it dropped steeply into the close and in after hours on news that GameStop Chairman Ryan Cohen filed to sell his entire stake in BBBY. Now that’s what we call a negative news catalyst. Will there be any positive news or dip-buyers today? Stay tuned. 

Conclusion

When meme stonks died off with the rest of the market in early 2022, the media jumped at the chance to make it sound like retail traders were down for the count … for good. 

But that’s the beauty of the markets: nothing stays down forever. Trends come back. That’s why the more effort you put into learning tickers when you start, the better off you’ll be now and in the future … when they move again. 

Get started with your trading education now with the Small Caps Rocket chat room. It’s just $9 a week for the first two weeks. I think you’ll find the opportunities you’re looking for while you’re there. See ya in the chat!

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