GameStop and AMC Entertainment surge, here's why meme stocks are going up

Meme stocks are going up again, with GameStop GME and AMC Entertainment AMC rallying over 30% at one point on Thursday, and adding 10% and 5% on Friday. The ARK Innovation ETF ARKK shot up 25% off Thursday's testing price levels first seen in 2017.

While we've seen this movie before - only to see dip-buyers get fleeced - a growing chorus of money managers are finding more reasons to wade into this unforgiving market.

Paul Schatz wrote on Friday morning that almost everything I look at is screaming to buy, after the S&P 500 had minted a fresh 52 week low.

Schatz pointed out that investor sentiment is mired at historic lows as more and more stocks capitulate. The number of stocks listed on the NYSE making new 52 week lows surged above 1000 for the first time since the pandemic sell-off in 2020. Most Pandemic darlings have round-tripped their gains and are now in the red since 2020 or before the stock market is set up for a face-ripping short-covering rally over the coming weeks or so, wrote Schatz. It is possible that the final bottom has been seen, but that is not something I am counting on right now. The high-growth names and meme stocks that have been pounded the most are front and center. The first bounce should see whatever fell the most, writes Schatz. Of the 45 stocks in the informally-constructed meme stock basket compiled by Yahoo Finance, the median drawdown, or loss, from recent highs is 73%, while the average is 65% Peering inside ARKK, it's not quite as bad, but still not pretty. The median component in the Cathie Wood-sponsored disruption ETF has been cut in half the average 44%. Even though stocks reward dip buyers this time around, it is not necessarily the all-clear signal sought by longer-term investors.

This will not be a V bottom like 2020 and 2018 when the Fed quickly pivoted and 'risk on' returns overnight, Schatz wrote. It is going to take some time. Handicapping the next move by Jerome Powell and his cohort at the Federal Reserve is the biggest piece of the puzzle and the biggest unknown. The Fed is only beginning to sell bonds from its balance sheet, a pace that will soon reach $95 billion per month, and investors are still pricing in 50 basis-point hikes for the next three meetings.

The markets predict another Powell pivot, this time to the dovish side with a concurrent easing of monetary policy, will likely result in a liftoff in risk assets. There could be a chance that tight financial conditions could cap a fledgling rally.

The Fed can't pivot yet, although they will later this year. Schatz wrote that huge asset sales are still to come. The markets have a lot of repair left in their hands. Jared Blikre is a reporter who is focused on the markets on Yahoo Finance Live.