Revenge of the Meme Stocks

0:05Meme stock mania is back some heavily shorted stocks connected to well known consumer brands or heavily debated themes have been surging. Why? And what does that tell us about this equity market as a whole? I'm Alison Nathan, and this is Goldman Sachs Exchanges.

0:23Today, I'm joined by John Marshall, head of derivatives research in Goldman Sachs Research. John, welcome back to Exchanges. Thanks for having me. So, John, we are suddenly seeing some very big moves in some unexpected stocks. So, give us the update. What is going on? Yes, we're seeing broadly volumes pick up, particularly in the options market. And we can trace that back to small traders or retail traders that are increasing activity. This has been happening over the last few weeks, but has really only come to light in the past few days, really, with the big up moves in select stocks. And so when we talk about these stocks that are moving sharply, they're often called meme stocks.

1:06But give us a definition of what that actually means. How do you define a meme stock? Well, meme stock, I think of literally as stocks that the internet is focused on and therefore retail traders become focused on. Now, surfing the internet and trying to nail down which the stocks those are, even by quantitative measures, usually fails. What we've found works is really monitoring volumes, small trades in specific stocks, tracking that in shares and in options, and that can enable people to get ahead of these trends. Okay, interesting. So you are bringing back a lot of memories of 2021 when we had, I think in my recollection, like really the first meme craze.

1:50So ultimately, when you think about how does this compare to that period, which was during the pandemic, so that felt like a strange time. Yeah, when we measure it quantitatively based on volumes, it looks like this is about half as big. And frankly, this type of wave happens about every six months. We saw one back in January. We saw one in July of last year. And so these waves come and go. And I think one of the things that's interesting about them is it starts out as a retail wave and then short covering among institutional investors tends to drive it even higher. Right. So that drives the volatility and some of these really big moves we're seeing.

2:31But I guess my question is, yes, you say we see them every six months, but this does feel bigger, at least to me, than what we have seen more recently. So why now for this renewed focus on these types of trades? Yeah, it's a great question. It is coincident with the passing of a couple of bills in Congress, the tax bill and crypto related bills. And so I think we're seeing some of the names or some of the themes that show up in the meme stock rally be in areas that are exposed there. In particular, a lot of them are crypto or blockchain related. Some of them are AI related. And there are certainly some retail related names, but it's more of these new technologies, new areas that are growth engines for the future.

3:15And so again, when we put this all together, ultimately, what is driving this? Is it investor behavior? Is it market conditions? Both? Yeah, I think it's optimism about the future. optimism about the medium term growth potential for some of these areas. And that gets retail investors excited. It leads people to think about upside asymmetry through buying call options, which is a big part of this. And it is really tough to refute in the near term. And so I think they feel emboldened. And I want to dig into what you just said a little bit in terms of how retail investors are getting exposure. You just mentioned options.

3:54Are they mostly using options? Is anyone buying the underlying stocks? Yes. So it's both and it's different for each underlying name. Some of them are being bought in shares. Some of them are being bought in options. But what's really interesting about the option buying, it tends to be the bigger effect because when you buy an out of the money option, it has small exposure to a stock. But if that stock rallies and then that call is worth more and has more stock exposure, it becomes a bigger position. So it's sort of a self-fulfilling prophecy that you get more upside exposure through options as the stock rallies.

4:31Right. So retail investors are savvy about this. They're trying to get the biggest bang for their buck. Yes. Assuming a lot of upside, that's where they want to be. Let me ask you the question I think you're getting most asked, which is how long will this last? Some of these rallies have actually fizzled even over the course of a day. So are we in for any sustained move here, or is this all going to be very fleeting? We find that generally this type of activity is measured in weeks. Our particular quantitative metrics use a two-week average to predict the activity over the next one week. So one could think about that kind of meaning if we see waning activity for two weeks in a row, then the next week is likely to be down.

5:13So from a activity perspective. And so what that tells us is we have not yet reached a peak or as of yesterday, we were continuing to move higher in activity. And so this likely has some legs. Some legs, but over weeks, we're not talking months or beyond. Got it. Okay. When we think Back to the 2021 episode, you had a lot of long, short hedge funds that kind of got caught wrong-footed in that environment. Are they better prepared in this type of environment to deal with these types of moves? Yes, I believe so. Most of them are better prepared. The ones that respect the activity that's happening in the volumes in the market by retail and options and monitor it and look for these two-week increases in order to get out of the way ahead of that and not get too rooted in their fundamental view, which fundamentals change as well.

6:06So I think that our hedge fund clients have been more adaptive. And that's why it hasn't been quite as painful as the 2021 episode. It's really striking how much things change. And five years ago or 10 years ago, this wasn't a thing at all. But now it's something that hedge funds really have to be focused on. Absolutely. And so when you think about what the smart long short managers are doing right now. What is it? Well, I think that there's really two things. One, they're monitoring the situations, understanding at the single stock level, because this is really, while we're talking about it as a broader theme, this is really stock by stock.

6:46There are about 30 to 50 names on any given day that retail may be paying attention to. The list may be 60 at this point, so it might be a little bit bigger than normal. But that type of focus is not on the whole market. It's on these 30 to 50 names typically. And so by becoming aware of the movements in those, they can focus on what's really impacting the stocks rather than throwing their hands up and hedging with some broad instrument. And so are these hedge funds really just monitoring the internet at this point to kind anticipate? I mean, how do you go about tracking what could move next? Yeah, it's a great question.

7:27There are certainly people who are monitoring the internet and have developed ways of scraping the internet and coming up with lists. And there are several other smaller services out there that do that. But the quantitative investors that I talked to have been wholly disappointed with that method. And the one that we've found when we quantitatively look at what predicts the future stock prices or option prices, it's really the volumes tell you where retail investors are acting, not just what they're talking about. And I think that that is the most important thing for predicting the future. Well, you got to get on that quick, though, because when you see the volumes going up, you know, these things don't last that long, as we just discussed.

8:07And another interesting point you just made, these are a small set of particular stocks, can it move the broader index or is this too small of a phenomenon? Well, this phenomenon in particular is unlikely to move the broad index, as we've seen relatively small moves in the index over the last couple of weeks as this has been happening. However, it is absolutely a positive sign. I would not read this as a negative sign for the broad market, people taking risks on stocks that are levered to the future and levered to, frankly, broader corporate growth. And I think that that's a positive sign for the S &P in general.

8:49Right. So this is a sign of risk-on sentiment, as we call it, in the markets. But ultimately, at what point does it go too far? I mean, can that be also a warning signal in some sense? Yes, it could. In this particular situation, we've seen a period of about three months prior to this where retail investors had slowed their buying. They bought significantly in January through April, all through the tariff turmoil in early April. They were buyers in ETFs and in shares across tech stocks, across the broad market. Then they paused for about three months. The buying kind of went flat. It wasn't as if retail investors were selling and that buying appears to come back.

9:33That bodes well for the amount of money because the job market has been good. And so they've been continuing to accumulate dollars. And it bodes well for the ability to continue to deploy that for some time. And that leads us to believe this could last longer than just a few more weeks. Right. So some dry powder from the retail investor base coupled with this positive sentiment means that this is probably not going to be a lasting phenomenon, but has some legs. Absolutely. And last year we saw in the July period, we saw a similar rally. It wasn't quite as big as this one in retail sentiment. and then news from abroad in early August caused a drawdown in the market.

10:19There's always the potential for external activity like that to affect the market, but it's looking like there's a lot of firepower. And when I think about the timing of all this, we are at the end of July now. August is historically not a very high liquidity month. So could that amp up the volatility related this over the course of the next several weeks? I believe it could, but retail investors also go on vacation. So there's the possibility that volume will come down as normal, but that doesn't necessarily mean the market has to. So should we just assume that meme stock episodes are a permanent feature of the market at this point?

10:57Absolutely. I think what the meme stock craze in 2021 told us, it brought to light how big a part of markets retail investors really are. There's 60 % of single stock options trading is retail investors, something like 25 % of shares trading. And in short-dated index options, they may be 80 % or 90 % of the customer volume. So retail investors are a hugely important part of the markets. And I think we've gained an appreciation as a market community that they're a big factor in how stocks behave. And that's a big shift, by the way, from 10 years ago. Absolutely. Thanks, John. Always so insightful.

11:36Thank you for having me, Alison. And thank you all for listening to this episode of Exchanges, which is recorded on July 24th, 2025. I'm Alison Nathan.

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