What Happens After a Stock Experiences an Earthquake?

02/17/2016 6:00 am EST

Focus: STOCKS

Bob Lang

Founder and Chief Analyst, Explosive Options

Though some traders may look upon stocks that have plummeted as “gifts from the trading gods,” Bob Lang of ExplosiveOptions.net doesn’t think these stocks are a bargain after the initial break and urges traders to wait for the aftershock.

Market uncertainty is creating extreme levels of volatility. In fact, it feels like we witness a stock crash every day. Recently, we saw some epic declines in individual stocks after companies posted shaky earnings reports. Topping the list was long-time growth stock LinkedIn (LNKD), the social networking giant that saw its market value nearly cut in half after reporting weak forward guidance. Tableau Software (DATA) had it even worse, falling nearly 50%. Other stocks also suffered smaller but still significant declines, namely Hanes Brands (HBI) and Outerwall (OUTR).

Selling is being led by institutions, aka, the big money. It is smart to follow institutional money flow, so when they are selling, we need to get out of the way. However, I still get asked, “When a stock plummets, should you buy?”

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In short, no. Some may look upon these drops as “gifts from the trading gods,” but frankly, these stocks are not a bargain. If you have a very long time line, you may eventually be correct, that stock you picked up for pennies might be worth a fortune one day.

For example, those who bought Bank of America (BAC) when it was in the $30s in mid-2008 (it fell to about $3 just six months later), probably got out at even or just a small loss. The beating financial stocks took was unprecedented, yet each drop was supposedly the “buy of a lifetime.” Instead, you were buying hope and wasting time waiting. But if you waited long enough for the sellers to finish up, you would have been OK.

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Back to the stocks that dropped recently. When there is an earthquake in a stock, we often experience aftershocks. Institutions do not distribute stocks all in one shot, though it may seem like it. Selling happens for many days, and as we see from the chart, these stocks are still being sold. Market rallies do not help stocks rise when there is heavy supply. Stock holders will use these rallies to sell more and least get a decent price. To see the last chart and read the entire article, click here…

Copyright: hjalmeida / 123RF Stock Photo

By Bob Lang of ExplosiveOptions.net

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