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Four Legs Good, WallStreetBets!

Updated: Feb 8, 2021

What a way to end January!

I don't think there are many people who have not heard of WallStreetBets after what had happened in the past week. I have been following this subreddit for quite some time. But little did I know that it will one day be a force that brings forth the big boys' worst nightmares...(which somehow reminds me of Animal Farm and hence the title)

Nonetheless, here is a quick introduction of WSB to get started.

WallStreetBets, commonly known as WSB, is a subreddit which has been sensational in the past year. If you haven't heard of it, you should pay a little attention to it and I will explain to you why in this post.

First of all, what is WallStreetBets really about?

For the uninitiated, WallStreetBets is a subreddit where you could find a huge number of retail investors (presumably the younger generation) gathering around to discuss potential stocks and trading strategies. As what the subreddit simply put, it is like 4Chan found a Bloomberg terminal. For those who do not know what 4Chan is, it is a forum which is the original incubator for memes- something we are all familiar with as part of the Internet culture. Hence, the idea of 4Chan with a Bloomberg terminal simply means an extension of the meme culture to investing. And that is how you get meme stocks.

You may ask: "What are meme stocks?"

Generally, they are just memes about particular popular stocks. These memes often do not carry any financial-related investing information. They are often humorous ways of recommending stocks with no actual real research behind them. As viral as how memes turn out to be, meme stocks are sensational as they quickly gather the attention of retail investors since they are fairly easy to understand in some ways. This allows the stocks to be popular among these investors in a very short amount of time, and is also the driving reason behind the success of WallStreetBets.

In 2020, we will see a surge in trading activities from retail investors. Just retail investors alone constitute around 20% of US order flow in the market in 2020. This is a significant jump from a figure of just 10% in 2010. This also means that retail investors are becoming a class of investors which has the potential to move the market more than what we used to think. And when this class of people gathers together, they are certainly a force to reckon with. This is exactly the scenario which is happening with WallStreetBets now.

In the past few months, WallStreetBets has had huge influences behind a few stocks which are quickly becoming the favourites of the redditors in this subreddit. These few stocks are namely GameStop (who can forget about this), Blackberry and Palantir.

First, let's focus on GameStop. The stock price mooned in value from ~20 USD on 12 Jan to ~325 USD on 23 Jan. On 23 Jan, trading in this stock was halted due to the huge volatility as the stock surges more than 70% as a likely result from the traders on WallStreetBets. This is essentially the result of a short squeeze- which is a phenomenon that arises from short sellers having to quickly cover their shorts by buying the shares at higher prices as the share price keeps increasing from the efforts of the traders who go long on the stock, resulting in further upward price movements of the shares. You may say this is absolute madness but that's not the end of it. Just last week, Robinhood stops trading of Gamestock and brought forth a whole load of backlash which crumbles the brand equity it has built up over the years. The reason behind the halt is primarily seen by some as an attempt to help hedge funds cover their shorts (but of course, this might or might not be a conspiracy theory and you are free to have your own opinion on it).

No matter what, you can't deny that this concerted effort among the traders on WallStreetBets is certainly very powerful.

And it's isn't just GameStop.

Both Blackberry and Palantir have seen huge upside momentum in their share prices in the past few months. Blackberry's share price doubled in value from ~7 USD on 13 Jan to ~14 USD on 22 Jan. Palantir's share price tripled in value from ~10 USD on 30 Oct to ~32 USD on 22 Jan. While some might argue that the price performance of Palantir might not be entirely due to WallStreetBets as this particular stock is already on the watchlist of many investors prior to its IPO, I personally think that the stock being a favourite among the community on WallStreetBets certainly has a huge contribution to its price based on what was observed among the other favourite stocks in WallStreetBets.

These three stocks aren't the only stocks actively promoted on WallStreetBets. There are many others such as Tesla and Nio which have been actively promoted on the subreddit across 2020. I guess I do not need to show you the price charts of Tesla and Nio to tell you how they have performed.

Now, what's the takeaway here? Should I be following WallStreetBets from now on, mirror all their bets and go YOLO in them?

Certainly, no. While there are some who made profitable trades based on recommendations in the forum, there are plenty more who didn't make it. You might like to refer to this medium article where the author shares some results from his trades following just advice from WallStreetBets.

While it's certainly not recommended to be trading just purely based on advice from WallStreetBets, I think we can no longer ignore the influence on the market by this particular group. You might not follow their trades, but you certainly do not want to be on the opposite side of their bets. They are now becoming a strong army whose influences you could no longer ignore. It's important for us to keep a lookout and understand what's trending in this subreddit to better prepare ourselves for potential huge movements in those trending stocks.

In some sense, I would argue such a phenomenon is akin to sentiment analysis which I wrote about almost a year ago. It is a known fact that sentiment analysis has the potential to push prices of certain stocks up, and what you are seeing in WallStreetBets is definitely a testament to this, where positive sentiments from a dedicated group of people on a particular stock could send the price soaring.

To the moon, they say.

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