– Samuel Goldwyn –
10 Reasons Stocks Go Up When You Think They Should Go Down
So there you are sitting at your computer looking for a stock that is over extended because you love short selling garbage companies. Voila! You found one that meets your criteria. You look deep into the fundamentals and they are horrible. You look at the daily chart and it’s up on air. You look on Twitter and everyone and their mother is bashing it. Perfect. In the morning you look to short it on a pop but instead of going down the stock goes up and up and up.
ARGH! How can this be, who the hell is buying this piece of crap and why am I covering for a loss are just a few of the questions that will race through your mind. Yes chances are your theory will be right one day but before you can be correct in your thinking you have to understand that sometimes there are various reasons a stock might go up when you think it should go down.
Don’t know what short selling a stock is? Click here.
- Short Squeeze – A short squeeze is a quick increase in the stock price that happens when there is less supply and more demand for a particular stock. So, if many traders are short a stock and people cover their position the stock will go up. The more people that do it at once the faster the stock price will go up. If you want to check the short interest of a particular stock before you get short click here.
- Buy ins – Sometimes a day trader or stock investor is forced to cover their shares of a particular stock because the short seller did not cover (buy) their shares in a timely fashion. Remember in order to short a stock you must borrow the shares with the understanding of giving them at a later date. If you don’t cover your short position and the broker needs those shares you will receive a buy in notice and be forced to cover (buy) at the end of the day. Buy ins can sometimes cause a short squeeze.
- Cult Followers – When I first got started with day trading the marijuana sector was HOT. After legalizing marijuana in Colorado investors started buying any stock that was tied to smoking. It got so crazy that some young guy started a site called the Wolf of Weed Street (A play on the Wolf of Wall Street). His site became so popular with cult followers of that sector that he had over 20,000 Twitter followers in a month. Cults are powerful and although most, if not all of the marijuana stocks eventually tanked, his followers helped keep that sector afloat longer than expected.
- Newsletter – Chat rooms can sometimes have hundreds and sometimes thousands of subscribers. Even if the main moderator tells his or her subscribers not to follow trades people do it anyway. This can cause a spike in volume and price action which could ultimately cause scared shorts to cover and aggressive longs to buy pushing you to cover at a higher price.
- Chart Pattern – Bull flags, ABCD patterns and a cup with a handle are a few chart patterns that retail traders understand as bullish signs. If the volume is there and all eyes are on a particular stock the chart pattern might give the green light to go long regardless of how bad the fundamentals are.
- You Misunderstood The News – Bad earnings seems like a great reason to short sell a stock. Logically if something is said to be bad people don’t want to buy it. However, if a failing company comes out with better than expected bad earnings that might be a sign to go long the stock for the short term. Bad earnings are bad earnings but better than expected bad earnings comes with a little glimmer of hope for bag holders doubling down and shorts covering due to the unexpected. That is why it’s always best to wait for the news to come out and watch the price action before taking a short position.
- Unexpected News – There was unexpected news today that stated Carl Ichan took a $1.3 billion stake in Amazon. The stock skyrocketed $12 within minutes. Then, shortly after, news came out that the rumor was false and the stock dropped right back down. Unexpected news or rumors can come out at any minute and if you aren’t prepared you can get crushed.
- The Whole Market Is Up – Three quarters of stocks follow the overall market. That means that there is a 75% chance that your stock might go up or sideways the day the market is hot. In addition if a particular sector is strong and your stock is in that sector you might find you have to cover that short position faster than you planned.
- Stock Is Already Beat – I remember one time Cliffs Natural Resources (CLF) had an analyst downgrade with a price target of $5. The stock was sitting at $7. Within a week it was over $10. If you pull up the 2 year chart you will see that CLF was over $70 at one point. A stock can only go down for so long before it either bounces or slowly fades off into bankruptcy.
- Press Release – Press releases are promotional tools to move a stock price higher. If a well known PR firm gets contracted to pump up a stock you can see a 300% rise in no time at all. Hard mailers, telephone calls, emails and Twitter can be some of the ways PR firms move a stock higher.
Well there you have it… 10 reasons stocks go up when you think they should go down. So, before you go shorting a stock because you expect it to go down dig a little deeper, watch price action and always have your hand on the trigger to bail out if your theory isn’t correct. You can always short again once the trend changes in your favor.