Meme stocks rally is a 'red flag' - analysts

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The U.S. stock market has continued to grind higher today, following a softer-than-expected inflation print. One of the aspects of longer market rallies is that it eventually spreads to lower-quality stocks.

According to BTIG analysts, the rally of meme stocks is “a red flag.” The MEME index has rallied in the past few days with investors pivoting from more defensive names to risk-on stocks.

“Over the last 18 months, when the MEME index has outperformed XLP by 10% or more over a three-day period, the SPX was lower three and five days later 12 of 17 times for an average return of -0.83% and -0.68%, respectively. 20-day returns had an average and median return of -1.45% and -1.60%, respectively. The last instance was 2/15/23, when SPX fell -3.62% over the ensuing three days post this signal,” the analysts said in a client note.

Hence, they cautioned against seeing meme stocks rally as a positive. Instead, this development is “a double-edged sword.”

“Obviously, it's encouraging to see breadth broaden out, and this includes the high shorted names and low quality. When we see a surge of this magnitude, however, especially relative to a defensive group like consumer staples, it often indicates a chase for what hasn't moved and can move the most, and this often is the tail end of the move,” they added.

For instance, AMC Entertainment (NYSE:AMC) stock closed 3.5% higher yesterday and is up a further 1.1% in pre-market Wednesday.