High “Beta” stocks tend to move in the same direction as the overall market but at a multiple of the overall index. So for instance, if the overall market is up 2% a high beta stock might be up 3% or 5%, or even 10%. “Meme” stocks are those that have gotten a lot of publicity on Social Media and also tend to be high beta stocks as well. Index stocks are those that make up a particular index and are often most volatile when first added or removed from an index. Today’s article covers the convergence of all of these three factors on June 25th. ~Tim McMahon, editor
Why This Stock Market Index May Be Headed for a “Bumpy Ride”
“Money losers tend to be high-beta issues”
By Elliott Wave International
On Friday, June 25, the Russell indexes underwent their annual rebalancing. In other words, stocks were moved from the Russell indexes like the Russell 2000 and Russell 1000 based on their size. This event usually coincides with a big jump in trading volume — like it did on June 25 — but generally, it’s an annual occurrence of little note.
However, this year’s rebalancing prompted these comments from the June 25 U.S. Short Term Update, a thrice-weekly Elliott Wave International publication that focuses on near-term forecasts for major U.S. financial markets:
Jeffries and Co. notes that today’s reshuffling lowers the quality of the Russell 2000 components to the lowest level since 2000. In other words, there are now more money-losing companies in the index relative to money-making companies than at any time in the past 21 years. The index’s largest component is now AMC Entertainment, the meme stock, which has been losing money for seven straight quarters. Money losers tend to be high-beta issues, so the index’s volatility should rise.
Also, keep in mind that the Russell 2000 is chocked full of money losers at a time when the index is near an all-time high. Of course, “meme” stocks are those which have received a lot of buzz on social media from retail investors. Gamestop’s stock is a well-known example. As you probably know, the price of Gamestop dramatically soared in January, crashed, and then eventually rebounded. Put another way, meme stocks may take investors on a very bumpy ride.
The June 23 U.S. Short Term Update took a broader view of these “chat room” favorites:
Meme stocks [are] a key to investors’ psyche and their degree of speculative fervor. Observers of financial markets may put meme stocks in the same speculative category as, say, bitcoin. The frantic investor behavior surrounding the hot stock of the moment and cryptocurrencies is a major sign that investor psychology may be near a peak. Elliott waves are a direct reflection of the repetitive patterns of investor psychology.
Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior, says:
The foremost aim of wave classification is to determine where prices are in the stock market’s progression. This exercise is easy as long as the wave counts are clear, as in fast-moving, emotional markets …
This quote is used because Elliott wave analysis — in addition to other indicators like what was mentioned about the “high-beta” in the Russell 2000 — strongly suggests that a “fast-moving, emotional” market will unfold sooner rather than later. You can get an in-depth understanding of the Elliott wave model by reading the entire online version of the Elliott Wave Principle: Key to Market Behavior — free!
All that’s required for free access to the book is a Club EWI membership. Don’t worry about your pocketbook because joining Club EWI is also free.
Club EWI is the world’s largest Elliott wave educational community (about 350,000 members and rapidly growing) and allows members free access to a wealth of Elliott wave resources on financial markets, investing, and trading.
Here’s the link to follow for free access to the Wall Street classic: Elliott Wave Principle: Key to Market Behavior.
This article was syndicated by Elliott Wave International and was originally published under the headline Why This Stock Market Index May Be Headed for a “Bumpy Ride”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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