RE:The (MASSIVE) Difference Between the Company and the StockThat is such a good post Star........and llike Nordico, I think you nailed it as far as market psychology!
starsearcher40 wrote: There IS a difference between a given company and the stock of that company in the market. Yes, eventually equilibrium balances out a stock such that it reflects the value. But there ARE occasions, and this is one of those occasions, where there is now a COMPLETE disconnect between the company and the share price. In this case of Bombardier, the opportunity is now there to make a LOT of money.
What the stock has witnessed in the pas8 8 trading sessions is literally the perfect storm which has hammered the price. These include:
1) Bad news. Yes, the news got the bad snowball rolling, but in NO way was the news as bad as the stock price now reflects. What happened when the news hit was it took the share price down below $3.00. In this light, the "bad news" was only what got the ball rolling. It's an important differentiation here. The stock has now departed from the value of the bad news itself, and other factors unrelated to the news have now taken over driving the share price.
2) The $3.00 level is a psychological level in the market, and this would bring some to sell beyond the news itself. But the $3.00 level is also a threshold for margin. The margin calls on such a widely held stock would be an absolute tsunami of selling. This is an artificial scenario, unrelated to the news itself. Yes, it is "real" in that the share price drops because of it. But it is NOT of the company itself.
3) The $3.00 level is also the threshold for a number of mutual funds. Due to their own covenants, they too would go into forced selling mode. The combination of Funds AND margin calls absolutely is devastating to the share price. Again, it is NOT of the news, or of the company. It is a doubly strong temporary phenomenon.
4) In the midst of the margin calls and Fund selling, panic starts to set in. The emotional component of a stock should never be underestimated as it can be absolutely powerful and feed/cycle on itself. This absolutely happened. There was full-on panic and fear and confusion, and in the midst of this, people just barf up their shares.
5) There is also another phenomenon that happens..not often, but I would suspect it in this case too. Funds are run by people, and people are human and emotional. It is not beyond a Fund manager, angry at things, to essentially piss on the stock. I wouldn't say this is a smart move, but it does happen. With bigger Funds, they'll dump fairly indiscriminately which damages the stock but does not represent too big a dent in their overall portfolio. Also, there will be managers who just don't want the stock showing in their portfolio, so they'll sell to get it off the books.
6) Upon the news, the shorts could smell blood. They would know full well ALL of the above factors and use them to their advantage for as long as it last, which is the point of full capitulation. Today, I would say that capitulation absolutely happened, with the volume confirming it. Today's volume was the biggest volume day in 10 years. There is irony in that the very day when people are absolutely barfing stock all over the place, that it is also the exact moment when people should be buying. That point was at $1.60 today, with some traders getting in a little too eager at the $1.80issh level.
7) It is that crossing point, where fear/pain are absolute and people emotionally sell, interjected with the same point where people are afraid to buy, that the stock drops the most and the volume goes through the roof.
So here's the thing. If you read back through all of the points above, how many of them are long-lasting, and how many are a temporary phenomenon? The correct answer is that the only real/lasting thing is the news itself, and there is NO way the news fully equates to the current share price. The trick then is to find the apex (bottom) of the temporary selling pressure. Buy at that point, and you'll make a fortune as the temporary/artificial factors abate, and the buying pours back in.
Was that full-on capitulation today? I would say so. It had ALL the hallmarks of a capitulation event. From here, I would expect to see the stock rebound strongly, throughout next week.
As the saying goes, and it is SO true: Buy when there is blood in the streets. Imho, the time to buy is now there in spades.