Trading Salience in a Hyperconnected Marketplace (Part 3)

  1. A catalyst (the short squeeze thesis, console sales)
  2. Salience (memorability and recall in the minds of low-information investors)
  3. Humor

Surfing the Mind Map

Source: https://en.wikipedia.org/wiki/Semantic_network#/media/File:Semantic_Net.svg
Spooky.
  1. There is a god meme (borrowed terminology from https://twitter.com/goodalexander — a fantastic mind and follow)/L0
Xpeng’s stock price as of Nov 16.
Nio’s stock price as of November 16th.
Tesla’s stock price as of November 16th.
There’s our parabola.
  1. The narrative — The major narrative characters of interest here are Melvin Capital (the “villain”), Point72 and Citadel (other “villains” per the evolving story), WallStreetBets, Ryan Cohen (Chewy genius billionaire), DeepFuckingValue, and Michael Burry. To keep it simple here, let’s focus on what mining the narrative can tell us for stock trend prediction:
  • Michael Burry — One of the original heroes of the story (and full time Trump apologist on Twitter), Michael Burry bought into Gamestop early on through his fund, Scion Asset Management. Thankfully, we can easily view the 13F of Scion here. While there are a lot of safe, unexcitable “boomer” names (Altria, AllState) in the list, I immediately fixated when reading it on a few names: DBI (Designer Brands) and FL (Foot Locker Inc). This is because those names are salient given the god meme (similarly out-of-fashion retailers on a long term stock price downtrend, especially DBI). Based on this, I made the call to go long on DBI (given its lower price point and weaker recovery than FL). It already paid off, going from $11.xx to a peak of $13.33 on Friday.
  • Ryan Cohen — The mentor of the monomyth himself. His most famous association pre-Gamestop is with the company he founded, Chewy. Let’s take a look what Chewy did during the Gamestop period:
Good boy!
It’s hilarious that a 50% price increase in one day looks so small here.

Rambling and Speculations

  1. Cash inflows radiate from the god meme/L0 to semantically associated stocks in a predictable proportion and sequence — As we could see neatly through the Tesla effect, the strongest associations (ARK, other EVs) tended to rally to perhaps similar degrees (in fact arguably NIO returned more than Tesla did to investors in 2020) and at a similar time as Tesla. What’s more interesting is farther out connections (L2, L3, etc). These tend to enjoy (at least observationally) a lag period to the god meme, allowing speculators a chance to profit (or profit again, if they missed the god meme itself). Similarly, they tend to rally but to a smaller degree, the farther the association.
  2. Associations can be made through time and space — There is no trivial way to map for instance, BLIAQ and GME. At least to a computer that is. In fact, it’s quite likely no post mentioned them together (pre-rally) in the same sentence online. This is a uniquely human phenomenon — we are designed to see patterns, even when the pattern may not exist. A savvy speculator can connect the dots here in ways that perhaps a computer can’t (at least not yet, to my knowledge).
  3. Hyper-connectivity begets reflexivity which defines the speed and impact of the trend — Or, in English: the more meaningful at a personal level the cause is, the more rally (and farther spreading) the rally should be. We can neatly observe this with Gamestop, which morphed from the speculative hobby of a few tech nerds and value investors, to a casus belli against the financial elite. This gives it staying power. Similarly, Tesla and the promise of a better future allows investors to blind themselves to fairly massive red flags (especially on valuation and Twitter decorum of CEOs). The trend stays. Lesser salience implies a shorter, weaker trend.
  4. Multiple themes can coexist in a trend, but one usually shows dominance — People, especially nowadays, tend to have short attention spans, and this is reflected in the market. While multiple trends can exist simultaneously, provoking rallies in disparate sectors (e.g. the stay-at-home/lockdown reopening twin narratives discussed in Part 2), in general the more impactful theme will ‘win’ (meaning a bigger, stronger rally).
  5. Trends can ebb and flow in response to catalysts in the god meme, but the farther the association the less impacted — A clever investor can see that even in the broader trend (Tesla as the vanguard of ESG in 2020), there were substantial ebbs and flows. In general, these tended to coincide with catalysts in the god meme (S&P Inclusion, the stock split, Tesla Battery Day). Interestingly, these ebbs and flows are less reflected in L1 associations, and even less as you radiate outwards.
  6. In general the god meme will be the most salient, simple narrative-We can see, in large part due to the interactions of low-information investors in hyper-connectivity (and the pile-on effect of momentum quantitative strategies), the god meme will reflect the most basal representative of the zeitgeist. Tesla is a car (and possibly energy) company, but due to the mad scientist founder Elon Musk also associates strongly with a bright future for humanity’s future. Gamestop is a video game store, but it is also a fight against the ruling class. These narratives win precisely because of how raw they are to us. We are an optimistic species, and we will turn on our blinders to reality for a rosy, simple picture.

Conclusion

  • Lily

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