Meme stocks rally is a ‘red flag’

The U.S. inventory market has continued to grind increased immediately, following a softer-than-expected print. One of many points of longer market rallies is that it will definitely spreads to lower-quality shares.

In accordance with BTIG analysts, the rally of meme shares is “a crimson flag.” The MEME index has rallied prior to now few days with buyers pivoting from extra defensive names to risk-on shares.

“During the last 18 months, when the MEME index has outperformed XLP by 10% or extra over a three-day interval, the SPX was decrease three and 5 days later 12 of 17 occasions for a median return of -0.83% and -0.68%, respectively. 20-day returns had a median and median return of -1.45% and -1.60%, respectively. The final occasion was 2/15/23, when SPX fell -3.62% over the following three days put up this sign,” the analysts mentioned in a consumer notice.

Therefore, they cautioned towards seeing meme shares rally as a optimistic. As an alternative, this growth is “a double-edged sword.”

“Clearly, it is encouraging to see breadth broaden out, and this consists of the excessive shorted names and low high quality. Once we see a surge of this magnitude, nonetheless, particularly relative to a defensive group like shopper staples, it typically signifies a chase for what hasn’t moved and might transfer probably the most, and this typically is the tail finish of the transfer,” they added.

As an example, AMC Leisure (NYSE:) inventory closed 3.5% increased yesterday and is up an extra 1.1% in pre-market Wednesday.