Why the market doesn't just fall straight down
I read so many damn comments from people claiming "manipulation" and that the markets are rigged. The usual scapegoat is the Fed "buying stocks". There's a case for those claims, sure, but maybe there's also more rationale for buying and rallying, in spite of a bear market or market crash, than those small brains can handle.
First, remember that for every trade there is a buyer and a seller. You'll often hear sayings like "more buyers than sellers" or vise-versa but that's mostly incorrect.. there may be more interest in buying than selling, but if someone buys 100 shares of a stock, there is someone on the other side of the table selling those 100 shares.
So what's in it for those poor schmucks that buy the bottoms? Let's dive in to a few individual stocks that got hammered and see what the thesis for buying and rallying is.
Starting with Boeing
BA--
Here's another one.
RCL, one of many cruise companies that have been slaughtered by the pandemic (which btw I read is NOT eligible for any govt bailout)-
Here's
MGM-
I like to think that the saying "tie goes to the runner" in stocks applies to those who are long. Here are some quick reasons why-
There are a lot of very angry bears out there as well as confused traders/investors that keep refreshing charts of the COVID cases and deaths. They are looking at news and seeing horror headlines and economic data like unemployment #s. And they are wondering, "Why are we rallying?" Think outside the box. These are likely all 'fake rallies' and 'dead cat bounces', but that doesn't mean there isn't money to be made from buying lows and selling highs. As I discussed in my Buying vs Selling ideas, there's also the potential that we've run out of parties interested in selling their shares for only 20% of what they were. I might list a car for sale on Craiglist for $10,000 and if all I get are offers for $2,000, I might just decide to keep the car. At least for now. Someone later may offer $6,000 or I may get in a position of needing to sell and willing to accept $1,000.
* One small detail: I know that buying or short selling stocks isn't the only way to trade. Someone who bought puts instead of short selling could have made a hell of a lot more than 80% profits on these plunges.
First, remember that for every trade there is a buyer and a seller. You'll often hear sayings like "more buyers than sellers" or vise-versa but that's mostly incorrect.. there may be more interest in buying than selling, but if someone buys 100 shares of a stock, there is someone on the other side of the table selling those 100 shares.
So what's in it for those poor schmucks that buy the bottoms? Let's dive in to a few individual stocks that got hammered and see what the thesis for buying and rallying is.
Starting with Boeing
BA--- You can see that Boeing fell about 75% from recent highs from the COVID-19 crash. A masterful trader who shorted at the very top and took profits at the very bottom made some big dough.
- And yet, someone who bought the bottom and sold the highs only 8 days later probably made MORE* money as share prices rocketed up 110%!
- Subsequent movement has a 35% drop for the shorts followed by a bounce up that has so far peaked at 37% at this writing but may have a little more juice in it. So already whoever bought this second dip made more than whoever sold the dead cat bounce.
Here's another one.
RCL, one of many cruise companies that have been slaughtered by the pandemic (which btw I read is NOT eligible for any govt bailout)-- Following an 86% drop, RCL rallied back 157% in only 8 days.
- After this dead cat bounce, there was a 56% drop followed by a (thus far) 80% pop.
Here's
MGM-I like to think that the saying "tie goes to the runner" in stocks applies to those who are long. Here are some quick reasons why-
- Speaking strictly to shares of stock and without margin, a long position's risk is limited to the investment. Someone who buys 100 shares of BA at $89.00 can only lose $8,900. Someone who shorts 100 shares at $89 theoretically has UNLIMITED RISK and losses can exceed investment! If a short seller is stubborn and holds on to that short all the way up to (theoretically) $890 a share, they need to come up with $80,100 somehow. And there are margin fees on top of that. Imagine a massive hedge fund or other institution and instead of 100 shares it was more like 1,000,000 shares- do you think they prefer limited risk or unlimited risk?
- Shorts see diminishing returns. Much like someone buying 100 x $89 can only lose $8,900, someone shorting can only make a maximum $8,900. Someone buying 100 x $89 has no ceiling to their profits.
- Usually over a long enough time long positions turn into a good investment. There's a decent chance that 10 years from now SPY shares may trade for $1000+/share. Also that's 10 years of dividends. Casual long-term investors and avg cost'ers can understand this.
There are a lot of very angry bears out there as well as confused traders/investors that keep refreshing charts of the COVID cases and deaths. They are looking at news and seeing horror headlines and economic data like unemployment #s. And they are wondering, "Why are we rallying?" Think outside the box. These are likely all 'fake rallies' and 'dead cat bounces', but that doesn't mean there isn't money to be made from buying lows and selling highs. As I discussed in my Buying vs Selling ideas, there's also the potential that we've run out of parties interested in selling their shares for only 20% of what they were. I might list a car for sale on Craiglist for $10,000 and if all I get are offers for $2,000, I might just decide to keep the car. At least for now. Someone later may offer $6,000 or I may get in a position of needing to sell and willing to accept $1,000.
* One small detail: I know that buying or short selling stocks isn't the only way to trade. Someone who bought puts instead of short selling could have made a hell of a lot more than 80% profits on these plunges.
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