Meme Stocks Strike Back

Christian DeHaemer

Written By Christian DeHaemer

Posted May 13, 2024

You may remember “Roaring Kitty” aka Keith Gill as the odd guy who launched the meme stock craze back in 2021.  Many newbies were in the market blowing their COVID stimulus money by day trading Meme stocks.

Well, today he posted a drawing on X.  The image was a guy with a game controller sitting up in a chair as if suddenly paying attention.  It was his first post in three years.

This was enough to send GameStop (GME) from $24 to $38 a share before pulling back on heavy volume.  AMC Entertainment Holdings (AMC) the movie theater company and also a meme stock from back in the day jumped 35% in sympathy.  

BlackBerry (BB) was up 7%.  Dogecoin (DOGE) the sarcastic crypto went from $0.136 to $0.153.  Bed Bath and Beyond is in bankruptcy and didn’t trade.

It is dumb money like this that makes you want to toss your Graham and Dodd book in the dumpster.  But you shouldn’t.  Being a contrarian long-term investor and relying on compounded interest is still the best way to acquire a fortune.

But if you like to make your money a little bit faster I’ll tell you how to do it.  First off don’t go chasing meme stocks.  You have no idea when or at what price people will start selling.

To make money in short-term trades you need a plan and you need to stick to it.  

What has worked for me over the past twenty-some years since I learned enough to be dangerous is to trade the breakouts on value contrarian stocks.

The problem with value investing is that you can be stuck in an unwanted stock for years, or even decades. I mean, you could have bought AT&T (T) in 1994 for $17 – which is what it trades for today.  T has a price-to-earnings ratio of 9 and pays a 7% dividend.  It could be a great buy right now, but I’m not going to touch it until it breaks its downtrend, puts in a bottome and breaks above resistance on strong volume.

Here is how you trade short-term breakouts.  

First, Google breakout stocks.  You will find a couple of sites that offer this info, if not, your broker probably does.  

Then look for a stock that is up somewhere between 4 and 10% on the day.  Then ask yourself if you understand the sector and know why it is down in the first place.  In this way, you will know why it is moving higher today.

For example, Chinese stocks are some of the most hated stocks in the market right now and have been for years.  The reasons are obvious.  Trade wars, threats to invade Taiwan, a dictatorship, central planning, massive debt, real estate bubble, a declining population etc.  

At some point, every sector finds a bottom.  This happened recently in China.

One breakout stock is Alibaba (BABA).  The Amazon of China was a $300 stock in 2020 and is now a $83 stock.  The company is beaten down.  They have a forward p/e of 9.42 and a peg ratio of 0.66.  This is a $927 billion company with over $600 million in cash.  That’s pretty cheap for a monster blue chip company.

Then I look at the chart.  This shows a coiled spring going back to the end of last year followed by a recent breakout on strong volume.  And another gap up today.  That is a bullish scenario and tells me the stock has bottomed and is going higher.

History tells me that stocks tend to rise a third (~33%) off of these breakouts which would put my sell right at the $120 market which is also the next point of resistance.  I fade that a little because I’m not greedy and click the sell at $115 button in my broker tab.  I put my stop loss in at $74 because you never know, and this limits my risk.

BABA One Year Chart:


Finally, you look at the news, which tells me that Chinese internet giants have been reporting better-than-expected earnings and are up about 25% in the past few weeks.  

Alibaba is reporting earnings tomorrow.  The market thinks that BABA will beat as well.  That seems legit.  You place your bets and roll the dice.  We have a good chance of winning and our risk is limited which is much better than buying a meme stock because Roaring Kitty drew a picture.

All the best,

Christian DeHaemer

Outsider Club

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