When a stock has been in a longer term down trend there are many ways that it can put in a tradeable bottom (assuming it isn’t a commodity stock in which case it may just file for bankruptcy at some point).
- The fundamental cause of its down trend goes away. This is what happened in Apple in 2013 after its 40% decline. Its iphones’ margins stopped eroding and it put in a bottom.
- Sentiment just becomes too bearish. We saw this in Pandora when it sold off last month to $13.30 before their earnings release. The stock’s fundamentals hadn’t deteriorated since it had traded under $20 but nevertheless traded down another 30%. It began to bounce before its earnings release and following another non-disaster quarter traded back up to $19
- An analyst at a large bank who has had a buy rating on the stock during a large decline finally decides to lower their rating causing some capitulation in the stock price, which reverses intraday, and leads to higher prices in the coming weeks. We saw this in AAPL two weeks ago when BAML analyst lowered their rating following a 15% decline.
Scenario three is what I thought we were potentially seeing in Micron this morning. MU has been hammered in the past six months almost cut in half. There was some BS rumor a few weeks ago about a potential takeover by a Chinese firm that cause the stock to bounce from 18 to 20, which when the stock rolled over added some more nervousness, and gave us some more potential sellers on the Open with the Wedbush downgrade.
I want to be clear that I’m not an analyst and I spent less than 60 seconds perusing the research report from the Wedbush analyst who downgraded the stock. I could glean enough information from its bullet points that the analyst thought fundamentals wouldn’t improve for MU until next year. From my perspective the recent price action in the stock and the idea that things might improve next year were enough to create a bottom on the Open and a $1-$1.50 bounce in the stock.
Here is a 2 minute video from our AM Meeting where the idea was discussed. Once the market opened I broadcast live in SMB Real Time as I built my position in the stock and discussed the price action that confirmed my thesis that it could bounce.
Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, options, forex and futures. He has traded professionally for 19 years. His email address is: [email protected].
Steven Spencer is currently long MU
