WallStreetBets Impact on the Market

Note: This post is provided as an example of some of our past work with WallStreetBets discussion data. This newsletter was originally sent out to Quiver users on January 20, 2021.

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In 2020 retail-investor representation in the stock market surged by 4.7% to a record 19.6%. Spurred by zero-commission trading and COVID tailwinds, this booming segment of stock market traders has reshaped market behavior. As a result, forums for financial discussion and inspiration have exploded in growth as well. WallStreetBets (r/WSB) is one of the most popular, with over 1.65m followers as of January 15, 2020. 

Quiver Quantitative has been scraping discussion on WallStreetBets for several months, and tracking how often different tickers are mentioned every day.

The graph below visualizes yesterday's discussion on the forum. Size represents the number of times a ticker has been mentioned, whereas color brightness represents the performance of the stock. GameStop Corp. (NYSE: GME) had the highest discussion count with 495 mentions and returned 10.89% for the day. To view the most recent data, click here.

A quick look at the above graph shows that many of the companies listed have experienced parabolic stock growth and volatility over the last several months. This begs the question: Has r/WSB discussion been a leading indicator for stock performance? 

To test this question, we backtested a simple strategy that buys and holds the 5 stocks that were most discussed on WallStreetBets in the previous week. We ran this backtest using data from 2020.

The graph below shows the portfolio holdings by week:

Tesla, Apple, AMD, Nio, and Microsoft were among the stocks that most frequently cracked the weekly top five most-mentioned tickers.

Over the last year this simple strategy was up over 61%, with especially strong returns in the last quarter of 2020. The "WallStreetBets Portfolio" was more volatile than the S&P 500, but outperformed even during the downturn at the start of the year.

To take a look at the relationship between WallStreetBets discussion and market activity at a stock-level, we’ve picked 4 stocks that were among the most popular on r/WSB in the last 120 days and examined them to determine if there is a correlation between r/WSB discussion and share price and volume.

Palantir Technologies Inc (NASDAQ: PLTR)

Big data analytics company, Palantir Technologies Inc, had its highly anticipated IPO on September 30, 2020 trading at $8.20. Shortly after, on October 14, the discussion volume of PLTR tripled to nine counts as well as achieving a 4.65% gain on the day. r/WSB count and share price activity continue to share a positive correlation coefficient of 0.592 as the stock reached a 52-week high of 33.05 on November 27, 2020. [Note: A value of greater than 0.7 is considered a strong correlation. Anything between 0.5 and 0.7 is a moderate correlation, and anything less than 0.4 is considered a weak or no correlation.]

r/WSB counts and PLTR volume for the same dates recorded a correlation coefficient of 0.803. This could indicate a large amount of individual-investor interest driving the recent valuation of Palantir which features a low proportion of institutional ownership at 14.41% (3Q20), compared to the industry average. 

PLTR received three downgrades from investment banks between October and December 2020 but added a price target increase to $30.00 (from $18.00) by Jeffries on January 11, 2021, well above its current price of $25.64. Risks still linger as 2Q20 to 3Q20 EBITDA losses increased by 83% to an $848.1m loss and, as of now, positive investor sentiment continues to support an uptrend. 

GameStop Corp. (NYSE: GME)

GameStop Corp. has experienced financial stress in recent years as the retail trends which had worked in its favor continue to decline globally. Total Liabilities climbed 12.18% to $2.26bn from 2Q20 to 3Q20. Before May 5, 2020, r/WSB activity on GME had been dormant averaging 3.83 counts daily YTD.

Shortly following this, several threads on r/WSB began to speculate on a GME recovery due to increased gaming activity and a large existing short position of 57 million shares at the time. r/WSB counts would be amplified after an investment from activist investor and founder of Chewy (NYSE: CHWY), Ryan Cohen.

Since May 5, 2020, GME has rallied 755.33% and r/WSB discussion counts averaged 55.34 a day making a positive correlation coefficient at 0.688.

The r/WSB counts and stock volume also shared a correlation coefficient of 0.628. This was exemplified on November 30, 2020, when stock volume spiked by 31.3m and discussion counts followed suit at 227 for the day. 

The mainly optimistic speculation of a GME recovery in May on r/WSB contrasted with most major media outlets at the time, which appeared to focus on store closures due to the COVID-19 outbreak. The rally and enthusiasm behind GME since that time was in stark contrast to many other corporations, 630 of which filed for bankruptcy in 2020 marking a 10 year high. 

Advanced Micro Devices Inc. (NYSE: AMD) 

On January 4, 2021, Advanced Micro Devices surpassed long-time competitor Intel in 1Q21 in desktop CPU sales and additionally had record revenue of $2.8bn in 3Q20, representing 164% of growth from the same period five years ago. These factors have been reflected in its valuation as the stock hit a 52-week high of 99.23 on January 11, 2021.

When we look at the r/WSB discussion counts and compare them to the share price, we encounter a unique occurrence: 

When evaluating these figures from August 8, 2018, to the present, the correlation is 0.187, however, when we look at just the past 100 days the same metric it’s -0.238. The graphs and table below illustrate how in almost three months, share price correlation slumped while price continued increasing.          

In further analysis, the r/WSB discussion counts for the past 100 days averaged 29.6, higher than the previous 400-day previous average of just 20.7. Nevertheless, the correlation with the share price declined. This occurred because once a stock reached a high enough market valuation, the influence r/WSJ has on its price is reduced because it is weighted more.

Visualized in the graph, the volume can be seen maintaining similar levels to the previous period. The dip in overall volume can be deceptive due to the share price increasing substantially, climbing 1,600% in a rally over the past year as of January 11, 2021. 

NIO Limited (NYSE: NIO)

To substantiate the previous claim regarding AMD we tested this on several other companies with similar scenarios to it statically, one notable company being Chinese auto manufacture, NIO Limited (NYSE: NIO). The table shows how as the company grows in valuation, correlation declines:

To further illustrate the theory, the graph below depicts how r/WSB count begins to deviate stock price growth on September 20, 2020 and again on November 30, 2020:

Summary

There is no universal method of finding actionable insights when analyzing r/WSB, but discussion on the forum can serve as a useful estimation of retail interest. Companies that have had exponential growth with help from forums such as r/WSBs are more likely to become transition to an organic growth phase with more institutional investors and less volume. Keeping an eye on rising companies on r/WSBs could help identify an opportunity that many may have overlooked.

To analyze more r/WSB stocks visit our r/WSB Discussion Data Dashboard or to access the entire r/WSB database and other data try our API.