Meme-Stock Mania: Is Market Brewing A Perfect Storm?

Chatterbox Moo wrote a column · Jul 20, 2023 17:23

Risk-on investments are the most popular they have been since late 2021—right before stocks entered the longest bear market in decades.

Meme stocks are rising

The MEME ETF—tied to the Solactive Roundhill Meme Stock Index—has risen 67% this year to its highest level since May 2022.

Its top holdings as of Monday included bitcoin miner $Riot Platforms (RIOT.US)$ (up 458% this year), artificial-intelligence lending platform $Upstart (UPST.US)$ (up 342%), $Coinbase (COIN.US)$ (up 211%), electric-car maker $Rivian Automotive (RIVN.US)$ (up 35%), and $Carvana (CVNA.US)$ (up 1,077%).

Meme-Stock Mania: Is Market Brewing A Perfect Storm?

Retail traders are feeling bold again

Retail traders are all-in, as bullish sentiment hits its highest level since 2021, according to surveys by the American Association of Individual Investors.

Fear has faded

Investors are showing less fear in the market as the put-call ratio, a measure of fear in the options market, falls to its lowest level since January 2022, according to Cboe Global Markets data. The Cboe Volatility Index, also known as Wall Street's fear gauge, is trading below 14. Anything below 20 is associated with little demand for insurance.

Concerns of a market crash loom

Market contrarians believe that a perfect storm is brewing for a market crash as retail investors' euphoria reaches new heights. Similar to late 2021, the put-call ratio and VIX were low. However, by early January 2022, all three major stock indexes had peaked, with the $S&P 500 Index (.SPX.US)$ eventually losing 19% that year.

It isn't just the exuberance that is giving some cause for concern. Higher borrowing costs threaten to slow down the economy, choking off credit for businesses and making it harder for companies and households to get loans. Over the past year or so, rates on auto loans and mortgages have jumped around 3 percentage points. Interest on credit cards is up to 22% from 16%, Federal Reserve data show.