Stocks Can Go Anywhere

October 15, 2012
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“Yahoo! was one trade that I tend to remember from about 10 years ago, back when internet stocks were going to the moon. I came in one morning short the stock and some positive news came out, taking it up 20 points. Then it went up 30, 40, 50, and I was scaling out of the short, cutting losses as others were initiating shorts or adding to their losing short position. When the stock held at +50 points, I actually reversed my short and went long. By the close that day Yahoo! was up 100 points and I had made back my losses. I always remember this one because it beautifully illustrates that stocks are driven by supply and demand, and can go absolutely anywhere regardless of what you think they are worth.”

- ‘The Equity Trader’, Invisible Hands

JS comment:

“Pounding the table” for fundamentals on a stock holding, whether long or short, can lead to absolute disaster when price action aggressively disconfirms.

The converse example of stocks like Yahoo! in the dot com boom — where the float was so small that true believers had total control — were various “cash box” value stocks in 2008, when the impact of forced liquidation selling was so extreme, companies saw share prices decline to market valuations below cash on hand in the bank. (These names eventually became fantastic buys — just as Yahoo! eventually became a fantastic short — but only after the supply / demand deluge subsided.)

Why do so many traders become enamored of a valuation case, bullish or bearish, in absence of respect for powerful supply / demand drivers that may have nothing to do with the fundamentals fixated on?

What are some ways to counter this mentality, or buffer one’s risk of succumbing to it?

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