Unless they were on another planet earlier this year, most investors were well aware of the invasion of the retail stock traders. Buoyed by zero commissions, stimulus cash and plenty of time at home due to the pandemic, many started following Reddit’s WallStreetBets stock forum.
The trade that initially got everyone’s attention was videogame retailer GameStop, which soared into the stratosphere in an incredible parabolic move caused by the massive short position that had been built on the company’s stock. The entire float, and then some, was sold short, and when the retail buyers piled in, the stock exploded higher. That move was exacerbated by the short sellers being forced to buy shares to cover.
The huge move certainly wetted the trading appetite for the legions of WallStreetBets traders looking for other hedge fund positions with huge short interest. GameStop was just the beginning, as soon the retail army focused on companies like AMC Entertainment, Bed Bath & Beyond and many others.
While Wall Street at first smirked at the little guys, all of a sudden they were a big factor in daily volume and stock movement. The BofA Securities predictive analytics team was intrigued and in a new research report started to examine if the Reddit data could indeed predict what they call “up-crashes.” The report said this:
With all eyes on Reddit after January’s short-squeeze, we turned to alternative data to understand whether what’s trending on Reddit can help predict future up-crashes. We analyzed data from an alternative data company (Thinknum) that tracks the number of stock mentions in the top 100 posts on Reddit’s WallStreetBets forum, where we focused on the SMID cap (Russell 2500) universe. Overall, we found no clear “tell” from the number, change in or share of mentions on Reddit’s WallStreetBets forum for stocks including GME, AMC or BBBY, which were the subject of “up-crashes” in shares in January. But given the potential impacts to performance from these tail-risk events, we think the data may be most useful to track on a cross-sectional basis (e.g. identifying the top 20 most-mentioned Small and Midcaps in the top 100 posts on Reddit’s WallStreetBets forum, referred to subsequently as “top-mentioned Reddit SMIDs” where all three of the above were among the top 20 the week prior to the Jan up-crashes. But with only a very short data history (since Aug’20) from which to draw observations, we believe the data warrants continued monitoring.
What we found intriguing in the report is that four stocks mentioned within the top 100 posts on WallStreetBets forum over the past week, as of Wednesday, May 12, are rated Buy at BofA Securities. If the data is indeed helpful in predicting big upside moves, it may be smart for aggressive investors and traders to take a look. It is important though to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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