Can The Meme Stock Index Act As An Equity Risk Forecasting Mechanism?

“Meme Stocks'' are stocks that experience extreme price increases in short time periods as a result of attention/hype generated on social media and online forums (most notably Reddit and Twitter). Since the price increase of these stocks is artificial (relying on the fever of the Internet) and not dependent on the actual performance of the company, these price spikes are typically followed by an inevitable crash. The objective of this paper is to analyze whether the performance of meme stocks can be used to predict movements in the S&P 500 and even the stock market crash of 2022. Our approach is to construct a meme stock index using the top meme stocks (e.g. GameStop, AMC) and then utilize a machine learning model to predict buy and sell signals based on the beta of the index. Overall, our meme stock index is able to correctly predict buy/sell signals 57.38% of the time. More importantly, our meme stock index is able to correctly anticipate sell-offs that will take place 9-days later 88.89% of the time. Thus, it can be determined that our Meme Stock index was able to predict sell-offs in the S&P 500 in 9-day time frames with a very high degree of confidence. We would like to thank Dr. Giuseppe Paleologo for this idea. Without his guidance, none of this would have been possible