| The S&P 500 has been on a tear lately, and there’s optimism among the experts on Wall Street that it will continue. But what about the folks swapping jokes and stock tips in forums like Reddit’s r/wallstreetbets? Michael P. Regan takes a look today at what might have set off the revival of meme-stock conditions. If this email was forwarded to you, click here to sign up. It’s the peak of earnings season for corporate America, when everyone involved in the stock market is hunkering down and sharpening their pencils to pore over the latest fundamental data presented to investors. Ha, yeah right. While many pencils are certainly in action, the prevailing narrative in the equity market has once again been hijacked by traders who couldn’t care less about the nitty-gritty of the stocks they’re buying. In fact, in many cases, the poorer the fundamentals are, the more attractive these stocks look to traders aiming to push share prices to unfathomable heights and burn short sellers who are betting they’ll go down. A quick primer on how all that works: Short sellers borrow shares from a brokerage, then quickly sell them and pocket the cash. The hope is that the stock will go down in the near future, so shorts can buy them on the cheap and return the borrowed stock to the brokerage. Short sellers’ profit is the amount for which they sold the borrowed shares minus the cost to buy them back to repay the loan (plus some assorted fees for the brokerage’s service). If the share price goes up after the short sold the borrowed stock, the trader can be in big trouble. The maximum theoretical profit from a short sale is something approaching 100%. Yet the maximum theoretical loss is something approaching infinity. As a result, if shorts get caught on the wrong foot and the stock price goes up, they’ll eventually rush to buy the shares to repay the loan. If enough shares were sold short, the buying pressure can be tremendous and send the share price to the moon in what’s known as a short squeeze. A similar phenomenon—known as a gamma squeeze—occurs when a rising stock price forces options dealers to buy aggressively. A squeeze of either variety is the main ingredient in the recipe to turn a company into a “meme stock.” That colloquialism was coined during the Covid-19 pandemic, when retail traders on Reddit and other social media worked together to cause a squeeze in the likes of GameStop Corp. and AMC Entertainment Holdings—and share some fun memes about it all in the process.  Remember the GameStop craze? Photographer: Michael Nagle/Bloomberg That first outbreak of the meme-stock phenomenon faded away as the world emerged from the pandemic: Stimulus checks and enhanced unemployment benefits ran out, and restaurants, bars and sports venues reopened, giving bored traders more options to spend—and gamble—their spare cash. So what caused the market to suddenly relapse this month into this bizarre spectacle of manic trading? It’s hard to say exactly, but there are some aspects of today’s market environment that rhyme with the pandemic days. First, there was a major plunge in the market earlier this year in reaction to President Donald Trump’s tariff threats, followed by the benchmark stock indexes rebounding in a relentless three-month march higher. That’s the type of move that can make investors’ appetite for risk turn ravenous. And the current crop of meme stocks—a list that includes Opendoor Technologies, Kohl’s, GoPro and Krispy Kreme—bears some similarity to the original memes of 2021. They’re all beaten-down stocks that haven’t benefited from the market’s ferocious rebound, and they all had a startlingly large number of shares that were borrowed or options market dynamics that portended a squeeze was in store. The relentlessness of the buying is reaching similar levels: Retail traders were net buyers of cash equities for 19 straight trading sessions, the longest streak since the frenzied days of the 2021 meme-stock craze, according to Citadel Securities. There will certainly be some hand-wringing and pearl-clutching in response to this ridiculous market action that reflects poorly on the world’s most important equity market. (Opendoor, for example, more than doubled on Monday before giving up most of the gains.) Yet who can blame the day traders for applying lessons learned during the crazy days of the pandemic to turn another quick profit when the circumstances presented themselves again? It’s not their fault those lessons didn’t stick among traders inclined to crowd into short bets. Related: Meme Stock Fever Can Cool as Quickly as It Begins Previously in Businessweek: How Rage, Boredom and WallStreetBets Created a New Generation of Young American Traders | 
