Under the meme stock craze, retail investors' "new favorites" change rapidly, with GoPro and Krispy Kreme soaring, while Kohl's and Opendoor plunge

The U.S. stock market continues to stage a meme stock frenzy, but the "darlings" of retail investors are changing rapidly. OpenDoor Technologies, a real estate tech company that doubled last week, has seen a continuous decline in the past two days, while Kohl’s, the "former retail giant" that soared on Tuesday, experienced a double-digit drop on Wednesday.

On Wednesday, July 23, at the start of trading, wearable camera manufacturer GoPro (GPRO) surged by 73%, and donut chain Krispy Kreme (DNUT) rose nearly 39%, but both later retraced more than half of their gains, with increases of less than 20% and 10% respectively at midday. Beyond Meat (BYND) had an early morning rise of 14%, but later increased by less than 7%.

Meanwhile, two other recently popular meme stocks both fell on Wednesday. Kohl’s (KSS), which closed up over 50% on Tuesday, dropped more than 10% in the morning, and Opendoor (OPEN), which had surged over 300% in the past six trading days as of Monday, fell over 20% in the morning after a roughly 10% drop on Tuesday.

This speculative frenzy continues the recent market euphoria, with retail traders coordinating actions through social media platforms to specifically target heavily shorted low-priced stocks. Options trading data shows that Krispy Kreme's call options trading volume set a record on Tuesday, exceeding 100,000 contracts, equivalent to 71 times the average daily trading volume over the past four years.

Analysts believe this phenomenon reflects extreme market sentiment but lacks fundamental support. Daniela Hathorn, a senior market analyst at Capital.com, stated that the significant surge in the stock prices and trading volumes of these meme stocks is primarily driven by social media discussions, short squeezes, and technical breakouts, despite no significant changes in the underlying businesses of the companies involved. Barclays has issued a "bubble alert" regarding this and advised investors to approach this excessive speculation with caution.

New Targets Locked In: GoPro and Krispy Kreme Become Hot Topics

Following Opendoor and Kohl's, users on the "retail investor base" WallStreetBets forum on Reddit have shifted their attention to new targets. GoPro, a long-dormant penny stock, has been trading below $1 this year, while Krispy Kreme's stock price is around $4, also falling into the low-priced stock category According to FactSet data, Krispy Kreme has 28% of its outstanding shares shorted, while GoPro has about 10% shorted, creating conditions for retail investors to initiate a short squeeze. GoPro's call option trading volume exceeded 56,000 contracts on Wednesday, reaching the highest level since 2021.

On the WallStreetBets forum, users posted messages like "YOLO DNUT," where YOLO stands for "You Only Live Once," typically used to describe high-risk all-in trading strategies. This speculative behavior is reminiscent of the meme stock frenzy surrounding GameStop in 2021.

Other stocks of interest include 1-800-FLOWERS.COM (FLWS), which rose over 10% in early trading on Wednesday, and Wendy's (WEN), which also saw a rise of more than 10% at the start of trading on Wednesday. Stocks like Campbell's, Aehr Test Systems, and Polaris, which have relatively high short ratios, also attracted buyers this week.

Short Squeeze Logic Reappears: Institutional Shorts Become Targets

An earlier article from Wall Street Journal mentioned that the core logic of this meme stock rally remains the short squeeze mechanism. When the price of heavily shorted stocks unexpectedly rises, short sellers face pressure to cover their positions by buying back shares, which in turn drives the stock price higher, creating a vicious cycle.

Taking Kohl's, which surged on Tuesday, as an example, about 49% of its outstanding shares were shorted, making it a perfect target for retail investors to squeeze. Without any substantial news, Kohl's stock price doubled at one point on Tuesday, reaching a 10-month high, with a total trading volume of 183 million shares, 25 times the 25-day moving average volume.

Opendoor has cumulatively risen over 300% since entering July up to Wednesday's intraday trading, while Kohl's saw an increase of over 40% during the same period. These companies generally have poor fundamentals, but the high short ratios and low stock prices provide fertile ground for speculative trading.

The aforementioned article noted that Bloomberg data shows retail investors currently account for 20.5% of total trading volume in U.S. stocks, while stocks priced below $5 account for over 26% of overall trading volume. Interactive Brokers chief strategist Steve Sosnick referred to this phenomenon as "rushing to junk stocks."

Barclays Issues Bubble Warning: Recommends Diversified Trading Strategy

In light of the escalating speculative frenzy, Barclays equity derivatives strategist Stefano Pascale recently issued a warning, suggesting it is time to hit the brakes on the meme stock craze. Barclays' "Equity Frenzy Indicator" has surged to its highest level since the end of December last year.

Pascale recommends adopting a "diversified trading" strategy to address bubble risks, which combines individual stock options with broad index options like the S&P 500. Investors can bet on the volatility of meme stocks through options, which will far exceed that of the broader index. For traders looking to make more explicit bets against overvalued companies, purchasing put options can yield profits when stock prices reverse Since early July, Pascale and his colleague Anshul Gupta have continuously warned about excessive market sentiment. They pointed out that the increase in SPAC mergers and the 73% rise of the ARK Innovation ETF over the past three months are "typical signs of a bubble market."

However, Steve Sosnick believes that a diversified trading strategy may not be the best way to deal with meme stocks, as these stocks are often not core components of mainstream indices like the S&P 500. Pascale also acknowledged that "bubbles can last a long time, especially when the market has liquidity injections."

Market Environment Fuels Speculative Sentiment

The current speculative frenzy is occurring against the backdrop of the U.S. stock market hitting new highs, with the S&P 500 index closing at a historical high again on Tuesday, up more than 7% this year. Investor concerns about tariff policies have eased, and ample market liquidity has created conditions for increased risk appetite.

Wolfe Research stated in its report that the initial phase of the junk stock rebound can be attributed to the elimination of downside risks to U.S. GDP, expectations of Federal Reserve rate cuts, stronger-than-expected economic data, and tariff news not being as bad as feared.

Mike Bailey, research director at FBB Capital Partners, warned that current market sentiment is "heading towards irrational exuberance," with investors showing less concern for the rising risk factors. Michael O'Rourke, chief market strategist at JonesTrading, pointed out that enthusiasm for meme stocks often overlaps with enthusiasm for cryptocurrencies, and this frenzy is spreading from digital assets to the stock market.

Compared to 2021, the current macro environment is more complex, with investors facing challenges such as high inflation and pressure in the real estate market, but ample liquidity and technical rebounds still provide support for short-term speculation.

Risk Warning and Disclaimer

The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk