Meme stocks fall out of love as rate hike fears dampen speculation

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Jan 24 (Reuters) - Meme stocks GameStop Corp (GME.N) and AMC Entertainment (AMC.N) continued to fall out of favor for investors as fears of a faster rise in interest rates puncture the prospects of speculative trading.

After surging 600% last year amid a retail trading frenzy, GameStop fell 11% on Monday, extending a 28% slide from the start of 2022. Similarly, AMC has lost a third of its value so far this year following a more than 1,100% jump in 2021.

The value of the heavily shorted stocks zoomed when an army of small-time investors coordinated on online message boards such as Reddit's r/wallstreetbets, boosting their stock price and hurting bearish hedge funds.

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"As rates rise, the present value of future cash flows diminishes and it takes some of the speculation out of the market," said Thomas Hayes, managing member at Great Hill Capital in New York.

U.S. stocks are coming off their worst week since the start of the pandemic in March 2020 as a rise in the cost of borrowing would mark the end of the easy money policy that had fueled a stock market rally.

"There was a period there where there was all this free stimulus money and low rates and margin availability..that's coming to an end," Hayes said.

Other stocks that have drawn interest from retail investors also fell. Koss Corp (KOSS.O), BlackBerry , Avis Budget Group Inc (CAR.O), Workhorse Group Inc (WKHS.O), Bed Bath & Beyond Inc (BBBY.O) dropped between 14% and 36% so far this month.

The $1.6 million Roundhill MEME ETF , which provides exposure to stocks with high short interest and elevated social media activity, has slumped in six of the seven weeks since its launch.

"For longer than we anticipated, meme stocks stayed up to a level which was ridiculous," said Joe Saluzzi, co-manager of trading at Themis Trading in New Jersey.

Last week, Vanda Research, that tracks retail investor flows, said overall social media chatter on meme stocks has dropped substantially from early 2021, with some bit of speculative retail investor intrest around GameStop and AMC.

The two stocks were among the top 10 most-traded shares among Fidelity customers on Friday with buy far outnumbering sell orders.

Short interest as a percentage of free float for both the stocks have climbed back to about 20% each, latest data from analytics company Ortex showed. Towards the end of October last year, about 16% of AMC shares and 11% of GameStop's free float were in short position.

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Reporting by Medha Singh and Anisha Sircar in Bengaluru; Editing by Arun Koyyur

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