COMMENTARY ------ Anatomy of a Stock "Tank"
[FWIW -- Many of you know about this, but I thought I would post it anyway for those who do not. Note that I am not talking about the many honest "Shorts" out there who do honest DD and play fair. Also note that 3-5 years ago this happened in reverse with "Hypes" making up rumors to get the price of a stock up by "hook or crook"]
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I have been investing for over 20 years but seldom have I seen a Market full of so many amateur traders or so prone to panic. It is so easy and profitable to play the “panic” game and that’s exactly what some vicious “shorting” institutions and Hedge Funds are doing.
Here's how it often works.
1) A major group or institution targets a stock that may be about to announce earnings and “shorts” it. Sometimes they wait until after the announcement. If the earnings are bad, great! But if they aren’t, it doesn’t necessarily matter. Why? Because they have ammo ready to start a panic anyway. And it's all courtesy of this "Sell First - Ask Questions Later" market and all the panic-prone small traders out there.
Indeed, sometimes a company that reports good earnings can work better for them, because if they are successful in turning the stock down, traders then freak. “Something strange must be wrong if they reported great earnings and the stock is going down”. The unknown fills them with fear and doubt that something must be going terribly wrong behind the scenes. It's often very effective and dirty.
2) If the earnings are pretty good or even very good (witness ESST a couple quarters ago who beat by 6 cents), the "Shorting" group often will let it go up after-hours, but soon a rumor is started to help start the "tank."
The bashers on Yahoo, that are sometimes part of the plan, get busy. Don't forget the media. Their every-ready reporters are fed a "spin" on why the stock is tanking. It could be the ol' standbys like “they may have cooked the books”, possible credit issues, asbestos liabilities, fear of competition, downgrades, or any over-exaggerated or scary-sounding concern. It may even be something that was used last quarter to tank the stock after earnings. [witness ACF or ESST]
3) But I get a little ahead of myself. The rumors start on the trading floors first and the small traders get very nervous as he/she sees the stock tanking. “What the H@*! is wrong, they yell, there's no news is there?" "The earnings were great, the guidance was good, what the f*!@" is going on? The small guy who bought for a quick “pop” because of a good report and good fundamentals, gets very nervous. Meanwhile message boards like Yahoo may be running rampant with paid and unpaid bashers posting in capital letters that the “STOCK IS GOING BUST”. “MUST BE ACCOUNTING FEARS – WATCH OUT”, “Bad News Coming” or some other emotionally-charged message. The Soap Opera has begun.
4) The next day, some analyst firms may take advantage of the rumors by having their analyst issue a “Downgrade” with the purpose of fueling the panic, so either their company’s “short” positions are taken care of, or the stock is pushed down to way oversold levels, so they can get their clients in cheap.
5) On message boards, a few small traders may try to bravely support it for awhile, but most often simply cave in later than the rest. Fundamentals are now being totally ignored because people believe they don't matter. The stock is now in full panic mode.
The stock may start to recover near a major whole number, only to tank again later or the next day further. People who placed stop-losses just below support only give the MM’s an excuse to go down and get them. MM’s also take advantage by wildly moving the bid/ask so that they can take advantage of those selling or buying “at the market”.
6) Finally after a day or two or three, most of the selling may finally become exhausted. It usually takes more than a few hours. Reason and common sense finally return and/or “shorts” cover or institutions who downgraded get their clients in “long”... and up we go! Often the small guy gets in late hoping to catch a big run, just as the big guys are getting their clients out. Again, more frustration.
7) Often several weeks or months later the stock is much higher than it was before the tank started. It turned out to be much about nothing, all manufactured or overblown. This happens time and time and time again. And the small guy falls for it over and over and over.
A RECENT EXAMPLE
ACF was a good example during Aug. 7 and 8. They came out with record earnings again for the umpteenth quarter in a row. Perhaps a bit strangely, two major firms “downgrade” the stock even though they only cut EPS forecasts by 1% and even though the forward PE (by their calculations) was less than 3! You might have thought they might rate the stock "cheap on valuation." By no, they want to fuel the panic.
By the way, the analysts who downgraded only cut full-year 2003 earnings by 5 cents (i.e. reduced the earnings for 2003 from $4.55 to $4.50 but that was enough. People just saw the word "Downgrade" and freaked. Never mind the PE was already near 3 and it had typically been 10-20 during the last 5 years.
Of course, then bashers on yahoo shouted concerns about delinquencies and “cooking the books”. Not surprisingly, it was the same thing that shorts have said every time they targeted this stock. I know, because I went back and checked. In fact, last October 2001, the bashers posted about serious delinquency concerns. They said the company was going under. A few weeks later they stopped posting altogether and the stock ran from $15 to $46 over the next 4 months. Strange? Well, not really, they do it all the time on stock after stock that had good earnings reports and forecasts - KG, ADVP, SGR, ACF, ITRI, EMBX, etc.
Anyway, I digress. On Aug. 7th, 2002, ACF tanked from $17 to $12 by day’s end after the good earnings report. Then Aug. 8th it tanked from $12 to $9.25. Then, of course, after the small guys had been thoroughly frustrated and "panicked-out" time and time again, the stock stabilized and ran back up to $12.50, closing at about $12.25. It had run up over 30% from the low of the day. Ironically enough, fundamentals mattered again.
THE MORAL
The moral is be careful if you play the “game”. Emotions cause wild swings and patience plays a big part, both on the buy and sell side. Newbies should stay away if they can’t control their emotions. |
