Checking premarket activity in the tech sector today might give one an unsettling feeling in the stomach as certain stocks are dipping hard (at the current premarket nadir: Magnite -18%; HEXO -15%, KBNT -19%, APPS -9%). While there are sometimes legitimate macro structural reasons for a sell off (like the tech bubble burst of the late 90s), often these downdrafts are related to a single bad news story: we just crossed the grim statistic of 500,000 COVID related deaths in this country and that awful statistic is certainly playing on the psyche of most Americans.
What happens during times of uncertainty—especially with job security issues and a rocky business climate—is people are extra careful with their investments, and rightfully so. Beyond researching good growth companies and having a diversified portfolio, many retail investors also set up stop-loss orders with their brokerages at various increments (-10%, -15%, -20%, etc.) so that way, in the event of a sell-off, they are protected from catastrophic loss. The problem is hedge funds/private equity folks know this and will be happy to exploit a mass fear based selling situation.
When Spruce Point Capital put out their hit piece on Magnite a month ago, it created the desired effect of panicking retail investors to cough up their shares, driving the price low. This allowed Spruce to make money quickly on a short sell, while at the same time gave institutional investors the opportunity to load up cheap. Who are the losers in this situation? It’s the retail investors who actively sold during the panic or from their brokerages’ stop-loss triggers automatically doing it for them. As each big percentage number gets hit, more circuit-breakers go off propelling a flood of shares back onto the market, driving down stock price.
And then the private equity sharks (and savvy retail investors) bide their time to gobble up shares at their low point, which eventually will send the stock price back up. This entire cycle can take a full trading day to accomplish or it can flash quickly in minutes, resulting in those careful retail investors with stop-losses to be left on the roadside having sold their shares at a discount (and now having to buy back at an inflated price). Make sure you don’t get shaken out on a day like today and miss an opportunity for a big run-up, like what might occur post market on Wednesday when Magnite reports their earnings. Because make no mistake: private equity wants your cheap shares.
“In the midst of chaos, there is also opportunity.” – Sun-Tzu
Excellent and accurate perception
I became a new trader about 3 years ago. This is a lesson that I learned the hard way but learned it well. I now know to stick to companies that I have saturated in DD and know that the fundamentals and catalysts are in tact. When I get fearful, I remember the past and recheck the story and keep holding if all is still solid.
Your observations are spot on. The challenge for most of us who are new to this is to stay calm and focused. Which is why I listen to what you’re saying.