“Meme shares” are a dangerous bunch. Susceptible to wild and unpredictable swings based mostly on rumors and web message board discussions, they’re traded principally by retail traders in quest of the subsequent massive factor and with little regard for valuation fashions or the enterprise’s underlying fundamentals.
Whereas the actions of meme shares happen seemingly at random and exhibit unsystematic threat, how do meme shares transfer relative to inventory market indices and different meme shares?
As soon as a inventory turns into a meme, we discovered, it not solely displays larger whole threat, or volatility, but in addition larger correlation with US inventory indices and with different meme shares. In actual fact, as soon as a inventory achieves meme standing, its correlation with different meme shares jumps over 80%, in accordance with our estimates.
So what’s a meme inventory? In our evaluation, we outline them based mostly on their prominence on Reddit’s WallStreetBets dialogue board. As soon as a inventory crossed a selected consideration threshold on the discussion board, we categorized it as a meme and recorded the date when it reached that benchmark. AMC Theatres, GameStop, Tesla, Mattress Tub & Past, and Tilray, amongst others, all attracted the requisite consideration on WallStreetBets, in addition to amongst retail merchants and the media, to qualify as memes and had been added to our record.
Utilizing this dataset, we first examined how a inventory’s correlation with numerous indices modified as soon as it turned a meme. We discovered meme shares jumped most in correlation with the Russell 2000 as soon as they enter meme territory: Their correlation coefficient elevated from 0.29 to 0.39. Their correlation with the S&P 500 rose from 0.26 to 0.27.
Large transfer days we outlined as these when a meme inventory’s worth swung at the least 10%. When a meme inventory jumped 10% or increased, the S&P 500 rose 0.26% on common. On days when a meme inventory fell 10% or extra, the S&P 500 elevated a median of 0.13%. Once more, this highlights a constructive correlation between meme shares and the market.
|Know-how Choose Index||S&P 500 Index||Russell 2000 Index|
|Meme Shares (Earlier than)||0.244||0.260||0.288|
|Meme Shares (After)||0.285||0.269||0.394|
So how did the correlation of meme shares change over time?
The common correlation amongst pre-meme shares was 0.21. As soon as they turned meme shares, nonetheless, their correlation with each other jumped to 0.38. That’s greater than an 80% improve in co-movement with fellow meme shares.
For context, GameStop and AMC had a correlation coefficient of 0.08 earlier than they turned memes. As soon as they crossed the meme threshold, their correlation with one another jumped to 0.45.
Volatility on an unadjusted foundation additionally rose considerably as soon as a inventory attained meme standing. Pre-meme shares had a median volatility of 83%. That jumped to 106% as soon as they turned memes. For example, AMC’s volatility spiked from 134% on an annualized foundation pre-meme to 239% post-meme.
Meme Inventory Correlation
|Earlier than Turning into Meme Shares||0.208|
|After Turning into Meme Shares||0.378|
In all, shares traded rather more carefully with the Russell 2000 small-cap index and with different meme shares after they turned memes. This elevated correlation suggests a threat that traders might wish to take note of.
For those who favored this put up, don’t overlook to subscribe to the Enterprising Investor.
All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.
Picture credit score: ©Getty Photos / Bruce Bennett / Workers
Skilled Studying for CFA Institute Members
CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can file credit simply utilizing their on-line PL tracker.