The meme stock crowd is expected to 'exit quickly': Expert

After re-energized enthusiasm in the meme stock trade this week, the hype seems to be fading as shares of video game retailer GameStop (GME) and movie theater chain AMC Entertainment (AMC) are sinking Wednesday morning.

Financial Insyghts President Peter Atwater sits down with Morning Brief Anchors Seana Smith and Brad Smith to compare recent meme trading activity to that of the early 2021 frenzy

"We should expect that as burst-filled as this last week has been, there should be a comparable bust coming in these names. The thing that distinguishes bubbles from from other kinds of behavioral patterns is that first step is the steepest," Atwater says. "So if this is an indicator of mood, we should expect these companies to leave via a high story window quite quickly."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video Transcript

Sounds like maybe investors should be getting a bit cautious here.

Any idea just in terms of what we learned from 2021 because clearly the levels that we're seeing today, we're not near the levels that we saw in 2021.

But even despite that, despite that discrepancy, you still think that just because of this euphoria because we have this momentum back in some of these names, it still is a worrisome sign here.

Then for the broader market, we don't have to get back to those levels.

And, and to me, this is sort of a broader mosaic of, of extreme sentiment.

We've got the vics down, you know, at, at prepubescent levels, we have um spreads in, in corporate bonds back at 2007 levels.

We've got excitement in the mortgage market at a comparable 2007 level.

So this fits with a broader series of indicators of mood that suggest we're, we're, we're getting extended.

Ok.

So where if anywhere from here does some of the flows typically go to after a memetic trade or, or momentum trade period has subsided.

So, so what you see is that the crowd exits quickly.

So we should expect that is as burst filled as this last week has been there, there will there should be a comparable bust coming in these names.

That the thing that distinguishes bubbles from, from other kinds of behavioral patterns is the that first step is the steepest.

So if this is an indicator of mood, we should expect these companies to leave via uh a a high story window quite quickly.

Um Now having said that where, where does cash go in this situation?

Um It tends not to because so much wealth is destroyed.

Um Remember too that the the cost basis for a lot of people is this week.

And so there's a lot of, of feelings of, of pain that happened to those who are last to this party, Peter if you could break down for our audience, just in terms of the retail interest versus institutional interest and the risk that this poses here to a retail trader versus institutional just in terms of what we learned in 2021.

And the fact that institutional tends to exit quicker and retail may be more at risk.

Yeah, the retail investor tends to arrive late and exits late.

So they, they tend to hold on in the belief that this too will resurrect itself.

And and this is to me the one of the psychological consequences that we're likely to see given this extraordinary bounce in in the nieto names that that this is now affirming that belief that it pays to hold on until the very end.

And so that to me suggests that the retail investor is likely to incur a a huge amount of pain ahead because this is, this trade tells them never, never sell.