The Surge behind the Surge

August 7,02020

To understand the upward pressure that's lifting stocks on a seemingly daily basis, you need to understand the rise of retail traders using free trading apps and "fractional shares".

I'm not talking about the stock market darlings of the moment; Facebook, Amazon, Apple, Netflix, Alphabet, Microsoft, or almost all of the other big companies that are in the NASDAQ 100, which is up 28% YTD.

Some household names you may be familiar with, that have had intermittent price pops with the credit going to Robinhood traders, are American Airlines, Delta, and Carnival. Kodak is still a household name, but the company is just a shell of its former glory days as a blue chip. This stock went up over 400% in one day last week on news of a Government backed debt guarantee of over $700,000,000.00 to manufacture pharmaceutical compounds in the United States. Since then the deal is being questioned and the stock has plunged from its very recent highs.

There are two basic reasons that could drive a stock price higher; improving fundamentals and price momentum. The former typically comes first. The latter means that traders are buying a stock because they see it moving higher. Because if the stock price is going up, it must mean things are good with the company. There's a term for that; momentum buying. I have nothing against momentum! It's a wonderful thing to buy a stock on improving fundamentals followed by your fellow investors buying the heck out of it on momentum, sending the stock higher and higher.

I believe the investor who buys on fundamentals knows what he or she is buying. I believe momentum traders don't know what they're buying. But they don't need to, so this point may be moot. However, there comes a point when the price move based on fundamentals is wrung out of a stock price and momentum becomes the only driver of direction.

Who is most likely to know a company inside and out? The professional money managers; fund managers, hedge funds, and analysts. Who is likely to know the least? The retail investor/trader. That doesn't mean that the retail investor won't kick the s*&t out of the professionals by riding momentum. In fact, a lot of professionals get nosebleeds at much lower altitudes than retail traders; making a professional look bad by selling too early. When momentum is red hot, it's painful for a retail trader to miss out and at the same time, it's painful for a professional to risk getting stuck with a hot stock that cools off. Hence, the former will stick around longer and the latter will bail out sooner. Generally speaking, anyway.

Presumably, the professionals are more experienced investors. They've seen hot markets turn to dust, like when the NASDAQ dropped 80% from its March, 2000 peak, aka "The Tech Wreck". Many hot stocks of that era disappeared. Robinhood app traders are young, not having suffered the consequences of a hot market run cold. It makes one fearless. I know. I was the hot hand back in the late '90's. It was an easy game. The "older brokers", who are the same age I am today, lol, turned to me for education about terms like "broadband", "DSL", "CLEC", and other techo-lingo so they could better understand the lay of the land. Don't worry! I am totally up to speed on the tech stuff and social media - I educate people about this and I'm probably the heaviest user of social media tools that you know.

Here's the thing; the very early days of the year 2000, the NASDAQ was already crumbling underneath the weight of its overvalued stock constituents. But the party like 1999 went on; everyone was partying in the penthouse suite, oblivious to the destruction of the lower floors. Because investors were selling their lower-tier tech/communications stocks and putting the sales proceeds into the technology blue chips of the day; that buying power pushed those market leaders' stocks even higher, sending the stock market averages to new all-time highs on a daily basis. The stock market averages' inexorable climb to new records covered up the destruction of the stocks underneath them. Market breadth was incredibly narrow.

The retail day trading phenomenon is not isolated to the US. It's global. The shear volume of small retail trades could be thought of as the individual drops that make up an ocean instead of just thinking about the ocean as a single body of water. Free, instant trading and the ability to buy stocks based on Dollar amounts instead of number of shares has arrived just in time for the global pandemic to make everyone bored at home. In Korea, Shin Poong Pharmaceutical, maker of a malaria treatment, surged 1,000%, making it the top gainer this year on the Kospi index. There are many examples like this in Hong Kong, India, Japan, and elsewhere.

I have no bone to pick with anyone trading on Robinhood, or any other app for that matter. As long as it is a learning experience and not a gambling habit, I'm cool with it. Many of my current and most of my future clients are millennials, so not here to hurl insults. Just sharing my experience with my world. My take on the Robinhood topic is the three videos below.

Funny thing, back in the '90's, how the commercials of the brand new internet stock trading firms like Etrade and Ameritrade, noted disruptors of their time, used the stocks of K-Mart and DELL Computer as examples of stocks you could buy on their platforms for very little trading fees. Investors lost a boatload of money on these two stocks.

The bottom line, keep an eye on those hot stocks on free trading apps. When they deteriorate, it's the beginning of the end.

For more reading, check this out from Bloomberg: The Robinhood Craze Is Now Moving Stocks Everywhere

Here's my take on Robinhood, in these brief video clips from a recent live episode of Be the Boss of Your Money:

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