(Bloomberg) -- The meme stock trading frenzy that captured market observers attention throughout the first months of the year may have come and gone, but the animal spirits behind it are still raging.
What's changed now is that the same people that were bidding up GameStop Corp., Tilray Inc. and the hundreds of SPACs that hit the market have moved more of their bets to cryptocurrencies, according to a note from Vanda Research.
“Prices of stocks like Tilray, Virgin Galactic, Plug Power and Nio have been inversely correlated with cryptocurrencies in 2021, which is indicative of a retail rotation,” wrote Vanda's Ben Onatibia and Giacomo Pierantoni in a weekly note to clients. “As Bitcoin sank following the Coinbase IPO, all retail favourite stocks enjoyed a decent recovery. But as the price of Ethereum and other altcoins skyrocketed this week, retail favourite stocks have given up most of their recent gains.”
As evidence of their claim, the Vanda analysts point to an inverse correlation that has been present since mid-March between the Bloomberg Galaxy Crypto Index and a basket of well known retail favorite stocks.
Of course, correlation is far from proof of causation, but there are other data points that lend credence to the hypothesis.
A chart of U.S. call option volumes shows that the number of contracts outstanding has dropped since the wildest days of the frenzy when retail traders were using the instruments to force short squeezes.
And further reinforcing Vanda's claim is what happened on Tuesday as the price of Dogecoin soared by more than 50%: the Robinhood Markets app, the preferred trading venue for retail, crashed as demand for the joke coin spiked.
It's like individual investors are playing a game of hot potato, said Tony Bedikian, head of global markets at Citizens Bank. “They go from one speculative asset, to moving money into assets where there can be more short term gains,” he said.
What that all means is that anyone looking to trade in stocks formerly associated with the retail frenzy now needs to keep an eye on action in cryptocurrency markets.
“Investors in ESG, electric vehicles and a host of other high-flying sectors will need to pay full attention to developments in the crypto world,” the Vanda analysts wrote. “A significant correction is all they may need to get some of their lost appeal back.”
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