The latest meme stock rally is fizzling and speculative buying by retail investors will wane through the rest of 2022, says Vanda

  • Retail investors are showing signs of slowing down stock purchases, including resurgent meme stocks, said Vanda Research. 
  • The firm said the average portfolio of retail investors has been declining, with recent losses at 23%. 
  • Bed Bath & Beyond stock crashed last week after a key shareholder cashed out his entire stake. 

The buying craze surrounding meme stocks — notably Bed Bath & Beyond in the latest round – is slowing down, and retail investors are likely to start reducing overall stock purchases through year’s end, according to research firm Vanda.

Over the past week, average inflows into US-listed securities amounted to $1.2 billion a day, not far off from the year-to-date average of $1.24 billion a day, the firm found. But history suggests that investors would have bumped up purchases on a down week, with the S&P 500 losing 4% over the last five trading sessions. 

“We expected to see a figure in the $1.3 billion- $1.4 billion range – especially as engagement picked up substantially thanks to the latest meme-stocks rally,” Vanda said in a note published Wednesday. “Furthermore, the lack of intraday rebounds at the market open is indicative of weakening retail demand which we suspect is a function of the fresh losses in meme stocks trading.” 

Bed Bath & Beyond shares have plunged roughly 56% over the past five sessions through mid-Wednesday to trade around $9.99. The stock crashed late last week after Ryan Cohen, the beleaguered retailer’s second-largest shareholder, cashed out his entire stake for a $68 million profit. The shares recovered some ground early Wednesday after The Wall Street Journal reported the company secured new financing to help boost liquidity.

Other meme stocks including GameStop and AMC Entertainment have also suffered sharp losses over the past five sessions, with GameStop down about 19% and AMC off roughly 27% through mid-Wednesday. Wedbush this week halved its price target on AMC Entertainment to $2 on dilution concerns 

“Retail investors face a crucial inflection point as summer draws to a close,” said Vanda, noting that the average portfolio held by retail investors has started declining. The overall drawdown of the average retail trader is 23%, close to the levels seen in March 2020 when the COVID-19 pandemic was unfolding. 

Retail traders temporarily outpaced the S&P 500 as the heavy exposure to meme stocks and large-cap tech favorites like Tesla and Apple generated “solid” portfolio gains. “Nevertheless, the meme stocks sell-off is now causing a reversal of that outperformance,” the firm said. Its VandaTrack segment monitors retail-investor activity in 9,000 individual stocks and ETFs in the US. 

Vanda said the latest rally was “doomed to wane” partially because investor sentiment is still predominantly bearish. Also, “the pace of retail purchases in the current craze failed to reach the prerequisite exponential growth necessary for a solid meme-stock rally (such as AMC in 2021).” 

It also doesn’t foresee a new wave of speculative retail buying as the year progresses because of seasonal factors.

“[Retail] activity generally tends to wane as a) market returns tend to improve (remember, retail investors are contrarian buyers), and b) in Q4, the holiday season means that most spending will likely occur outside financial markets.”

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