A historical event in financial markets took place in 2021. It was so big that even books and movies were made about it to explain the nature of the markets when there is a psychological alignment behind a single trend. Some may call bubbles blowing up and bursting; others call the herd mentality inherent in the stock market. Whichever way investors look at it, the same 2021 boom and bust might repeat itself shortly.
Twitter username RoaringKitty is back on the scene, as he was the one responsible for bringing the so-called “meme stocks” into stratospheric highs in 2021. As is his custom, his latest tweet gives subtle indications that now might be the time for shares of GameStop Corp. (NYSE: GME) and even AMC Entertainment Holdings Inc. (NYSE: AMC) to stage off new potential rallies and make those willing to bet on this trend overnight riches.
However, a deep analysis of the current situation in these stocks is called for before any decisions are made since these businesses don’t have any fundamental strength to support a rally or sustain it over the long term. This is why a review of past events is necessary before determining where these stocks are today.
Rinse & Repeat Cycle in Meme Stocks
Ever since the 2021 melt up in these names, management has taken on the same strategy to keep these businesses afloat. Since neither GameStop nor AMC generates positive free cash flow, they rely on diluting shareholders in order to fund their operations and keep the lights on.
However, favorable prices must first be present for shareholders to be diluted (issued stock into the open market) so that more capital can be pulled into these companies.
Here is where the rinse-and-repeat strategy comes in. Every few quarters or so, these companies run out of cash. Then RoaringKitty makes content that beginner investors see as professional advice. The stocks rally to stratospheric valuations, management dilutes the stock, and prices come back down to start the cycle all over again.
Knowing that this is the typical modus operandi in both GameStop and AMC stock, investors need to approach this situation with very light allocations as a percentage of their portfolios, just in case broader markets are not under the same mental state as they were since 2021.
GameStop Stock Shows Signs of Accumulation: Time to Boost?
When investors dig deeper into the volume data for GameStop stock, it becomes clear that there are signs of accumulation around the $25 level. Considering that the stock hasn’t spent that much time at that price, it would seem that whoever built up a position in the stock is ready to start leading it higher.
It might be convenient timing today as well, as the price of Bitcoin, another risky asset class linked to the behavior in meme stocks over time, has recently broken through its highly pursued $100,000 a coin level. Now that the euphoria and feelings of easy gains abound in the market, it is the perfect time for RoaringKitty to get the rest of the market behind another big bet.
The psychological state of the market right now would make it easier for gains made in Bitcoin to be reinvested into another quick scheme. This time, there are clear signs as to where GameStop might end up in the short term apart from its potential accumulation volume. The answer is found in the stock’s options chain, with a clear outlier position.
Over 60,000 call options contracts were opened for the $125 a share strike expiring in January 2025. This means that some investors are betting that GameStop stock could reach a high of $125 or more in a little over a month from today.
While this seems like a bold bet to make, looking at previous mania rallies in GameStop would make this view fit into the realm of reality. However, this doesn’t take away from the risk inherent in following the manic masses behind RoaringKitty’s posts.
Will AMC Join the Manic Market Rally?
By association, the answer is yes. Whenever the meme stock mania rallies hit the market, AMC stock tends to follow suit, and this time probably won’t be the exception. Over the past 12 months, investors can arrive at the same accumulation conclusion, as most of the volume took place around the $5 a share level for this name.
More than that, institutional investors might already be aware of the rinse-and-repeat strategy that management tends to apply in this company. For example, Geode Capital Management boosted its holdings in AMC stock as of November 2024 to show signs of confidence in the coming months.
With a boost of up to 12.1% in holdings recently, these institutional players now have up to $36.6 million invested in AMC stock, which is also in the vicinity of State Street’s position of $33.5 million with another boost of 14.6% during the same period as Geode’s allocation.
The evidence is there, and the timing seems right as cryptocurrency markets break key psychological levels and boost morale for riskier bets. These are tail risk trades, where investors can—and should—only place a small portion of capital for the chance to hit a big move ahead.
The article "RoaringKitty Returns: Can Meme Stocks Stage a Comeback?" first appeared on MarketBeat.
