Meme stocks rally, Oil tanks

GameStop rallied nearly 90% after Keith Gill, aka Roaring Kitty on Twitter, posted a screenshot on Reddit showing a big stake in option positions (about 120’000 call options that would give him the right to buy 12 mio GameStop shares for $20 each before June 21st). The holdings are unverified and no one knows if Roaring Kitty has any of these positions in hand, but it doesn’t really matter; the only thought that this could be true sent GameStop 90% higher before closing the session 21% up yesterday. Other meme stocks that have their names tied to GameStop-led meme craze like AMC, Beyond Meat, Blackberry and Reddit also benefited from the positive vibes yesterday. E*Trade said they would ban Keith Gill from their platform and the SEC explores possible market manipulation.

Fundamentally, a common denominator between the meme stocks is that they are not profitable companies, therefore the stock rallies don’t have a solid funding. If history is any indication, this wave will also quickly fade. When GameStop will reveal its Q1 earnings later this month, there is a chance that we have a confirmation that the rally is based on nothing beyond an impressive talent to move crowds into a trade.

On a side note, we originally had thought that the meme craze was fueled by a combination of low pandemic rates, piling up savings and bored traders (who were stuck home due to pandemic restrictions). But it turns out that all these factors are no longer valid. What’s also interesting is, thirst for dangerous trades is also visible in a relatively high interest for penny stocks. Finimize reports that 7 out of 10 most traded stocks in the US last month were worth less than $1 a share. So that means, to me, that there is still too much liquidity in the system. And there probably is. The Fed’s balance sheet for example is worth more than $7 trillion today, whereas it was worth around $4 trillion before the pandemic and less than a trillion before the subprime crisis. Bad news is, the Fed is unwinding its balance sheet as a part of its policy tightening policy. Good news is, the Fed said it will start slowing the pace of the balance sheet unwind – for I don’t know why, because that means that the balance sheet will never ever normalize. But the result is that, the financial markets do benefit from the still-ample liquidity despite the relatively high interest rates.

Beyond meme stocks

US yields fell on Monday after the latest ISM manufacturing data showed an unexpected acceleration in contraction in May as prices eased. The combination of faster-than-expected contraction and slower-than-expected price pressures fueled the expectations that the Federal Reserve (Fed) could – eventually – cut rates by the end of the year. The US 2-year yield fell to 4.80%, down from 5% tested at the end of last month, the 10-year tipped a toe below the 4.40% and the US dollar index sank below its 100 and 200-DMA. The softer dollar sent the EURUSD above the 1.09 resistance, Cable rallied past the 1.28 as the USDJPY eased.

All eyes are on US jobs data this week. Soft data should further fuel the dovish Fed expectations.

Lower yields didn’t necessarily translate into gains for the major US indices. The S&P500 remained under pressure before paring gains into the close and eked out a small 0.11% gain only. The tech-heavy Nasdaq gained 0.35%. Nvidia led gains. The stock rallied almost 5% yesterday as its CEO showcased new generations of AI chips at an event in Taipei. Note that Nvidia also announced last week that it would be upgrading its AI accelerators every year instead of every two years, and its new Rubin chip comes just three months after the Blackwell chip, revealed in March. The risinf speed of development is a robust sign that demand for AI is not slowing and the company is doing its best to stay on top of its game. Interestingly, at the same event, AMD also revealed its new chips – less than 2 months after the company’s last announcement. Alas, AMD dropped 2% on the news.

Elsewhere, crude oil had a rough session. The barrel of crude went on a free fall, cleared the a critical support at $75pb level and is trading near the $73.50pb this morning. OPEC’s plans to wind down supply cuts after the Q3, combined with a soft US data weighed heavier than the rising Fed cut bets. From a technical perspective, US crude is now at the limit of oversold market conditions and a positive correction is healthy at the current levels. Next support is seen at $72pb (a minor Fibonacci level) and the key resistance stands at $75pb.