Meme Mania

It appears that we have reached the top for meme stocks.  While many traders like to compare this to 2021, the breadth and firepower of this meme mania is far less than that crazy period.  Since 2021, retail investors have been sheared through numerous pump and dumps.  The HFTs, market makers, and pro traders got their pound of flesh taking the other side of these stock gambling addicts.  

The free capital available for the meme stock chasers is much smaller now.  There is no crazy Covid stimulus gravy train driving these moves.  The firepower is just not the same now vs when the government was handing out stimmies and fat weekly unemployment checks.  What capital is available for speculation is mainly getting sucked up by crypto treasury companies issuing overvalued shares to buy cryptos.  According to the WSJ, $86B has been raised for crypto treasuries so far in 2025.

Its amazing how much demand there is from investors who are trying to catch the next MSTR by paying 2-3x mNAV in companies that continuously dilute equity to buy cryptos.  Just the sheer audacity of these promoters and hucksters is amazing to watch.  They continue to hype such an obvious Ponzi scheme.  And its working, so far.  But the price action of bitcoin in recent days signals that we are at a local top, if not a final long term top.  The scam is just too obvious to sustain for long.  

The current mania in meme stocks and cryptos is almost as bad as the tulip mania several hundred years ago.  At least the internet bubble had a foundation of plausibility due to how revolutionary it was.   Now these companies aren't even pretending to try to grow revenues and be profitable.  Its just about pumping stock, sucking in the sheep, and feeding the ducks when they quack.  The veneer of legitimacy is getting thinner as the market trades more on memes and technicals than on fundamentals.  

We have the AI bubble, but its mostly confined to NVDA, AVGO, TSM, CRWV, and a few other smaller beneficiaries.  The lack of breadth in the AI names is quite telling.  There just aren't many companies that are using AI to make a profit.  Only those that are selling infrastructure that AI runs on is making money.  Even back during the dotcom bubble in the late 1990s, there were several profitable internet companies that weren't infrastructure related (YHOO, AOL, etc.).  Productivity gains from AI is heavily hyped, but its hard to measure.  Since so much energy is required to train and run these LLMs, you will need to have a lot of productivity gains to match the huge amounts of electricity consumption from all the AI data centers.

Investors and traders are running out of good small cap companies to invest in, so bad ones are getting pumped.  Even with all the pumping in heavily shorted names, the Russell 2000 continues to trade terrible vs the SPX.  Investors have now mostly given up on breadth as a bull/bear indicator, because the Russell 2000 has been lagging for so long.

Since the April bottom, there has been a huge short squeeze targeting cookie cutter long/short hedge funds.  They were all crowded in the same names, for good reason, but they put a target on their backs by doing so.  Traders have realized that its a lot easier to spook short sellers into covering stock and creating a short squeeze than to convince investors to buy stocks based on fundamentals.  High short interest stocks have massively outperformed low short interest stocks over the past 3 months.  You have to go back to late 2020, early 2021 to see a bigger divergence.  

The systematic long short HFs have gotten crushed as the SPX has gone higher.  

When hedge funds lose money, they reduce risk and close out positions not because they want to, but because they have to.  That's what causing these short squeezes in highly shorted stocks.  But once the weak hands have covered, there is no further buying demand because no one who actually looks at fundamentals would want to buy these names.  The price action this week in heavily shorted names and meme stocks is quite telling.   While the SPX has grinded higher all week, the heavily shorted stocks have lagged all week.  The chart for meme stock OPEN, the AMC of this recent meme mania, tells all. 

 The peak in excitement for these meme stocks was a week ago.  Since OPEN, sympathy meme plays like DNUT, KSS, and GPRO have had recent pumps but died out quickly.  The meme stock bagholders are beginning to pile up, and that dead weight of overhead supply will be weighing on future pump attempts.  

The COT data for SPX and NDX futures as of July 22, 2025 shows asset managers selling into the rally.  Asset managers have been reluctant to add to their big net long position into the furious rally off the April lows. This is not what you want to see if you are short the indices.  

Surprisingly, the put/call ratios have not been that low during the grind higher this week.  It appears that we are still seeing put buyers looking to hedge ahead of tariff announcements on August 1.  You probably need to get past that deadline and have the uncertainty go away before you can find a reliable top.  We did get some more trade deal optimism over the weekend.  But we've squeezed about as much juice as you can from these announcements.  I want to see the VIX go a bit lower and for more call volume to get back into index shorts.  

It has been a tough times for short sellers.  This is about as bad as it gets, although 2021 was pretty bad for shorts as well.  But there was a good reason to avoid shorting back then:  the overflowing Covid stimulus and liquidity.  This time its not liquidity that's driving the move, its pure animal spirits and FOMO.  The 2020-2021 everything bubble ended with a 25% bear market when M2 money supply growth and liquidity exploded higher.  This bubble doesn't have the same ammunition.  Considering how overvalued and overextended this market is, it would not surprise me to see a worse bear market after this bubble bursts than the last one in 2021.  But we need to get to the top first.  Its tough to time the top so it may take multiple attempts on the short side before success.  For short sellers, its important to keep losses contained to be able to capitalize when the worm turns.  

Covered my SPX short for a loss late last week.  Still maintaining most of my single stock shorts which have been trading much weaker than the overall market.  The strength, lack of pullbacks, and resilience of this market is surprising, but it sets up better opportunities for the fall  These relentless, one way grind up moves often peak about 5 months, after the bottom, or start of the move.  The market bottomed on April 7.  5 months from April 7 is in September.  If there are some better indications of a top from options or COT data, I will consider putting on an index short before then.   If not, will probably just focus on single stock names with bad fundamentals.