How Stocks React: Emotion vs. Fundamentals
There have been two stocks in the news recently that have reacted entirely differently when it comes to their fundamental news and how these two particular stocks have reacted on an “emotional” level if you will.
The two examples I will use here are the stocks Digital Ally, (DGLY: Nasdaq) and Whiting Petroleum, (NYSE: WLL). Both stocks have traded well, in both instances, demonstrating good volume, range, and price action; not to mention fundamental and/or material news that we look for as traders at Tradeview Markets and two stocks that should be familiar to all.
Let’s take DGLY as the first example. A company that makes digital video imaging and storage products for use in law enforcement and security applications or plainly put, cops wearing digital cameras that are made by Digital Ally.
In the middle of last year, August specifically, during the Ferguson riots in Missouri, DGLY was trading below $5 a share and trading roughly 200k shares a day at best. Except for those believers that the apocalypse is coming sooner than later, DGLY was hardly a screaming endorsement for investment and certainty not a stock to trade. Then the riots hit with cops in Ferguson either getting killed or targeted intense racial relations.
Unfortunate, but then frenzy started and Wall Street, as usual, looked for a way to profit and surmised that DGLY would be the next TASR…look that chart up. DGLY went parabolic, demonstrated by the chart below, going from $5 to $35 in almost two weeks and trading 10mm, 20mm, and sometimes even 30mm shares traded, keeping in mind that 250k shares were once a big day. For those fundamentalists, DGLY which back in 2008 almost hit $100 a share, there were questions about earnings and fundamentals to which DGLY wasn’t even making money but as we know when stock trades, the price reflected is not “where it’s been but where it’s going.”
After making a high of $35, DGLY “corrected” and a month later was bouncing between $10-$20 before settling back in the $10-$15 range…significantly off the high. DGLY made that huge move because traders and investors were driven by emotion (albeit ALOT short covering as well with 3mm shares outstanding) but it is what is and a stock at that time that had to be traded.
Now…DGLY had earnings March 23, and as demonstrated by the chart, reacted well on the open and keeping in mind that all Indexes, International included, are at all-time or multi-year highs, DGLY posted a PROFIT of $.05 cents a share compared with a LOSS of $.50 cents a share during the same quarter last year. Revenue soared to 55% in the “strongest three-month period in the last twelve quarters.”
DGLY traded near a high of $16 early in the session before fading or selling off nicely to close at $14 and closing up 12% for the day but hardly a good close for a stock that was up almost 25% on the day. Also to note that DGLY traded almost 5mm shares on the day. My point will be in my conclusion…
Now, let’s take Whiting Petroleum as the second example of how a stock reacts to fundamental news vs an emotional reaction to material news. WLL, as demonstrated by the name, is an oil and gas company in the news laden Permian Basin and Rocky Mountain area of the US and to no surprise has been down precipitously with the decline in crude oil; off from a year high of $92 and as of the close of 3/24 is trading at $31.
As demonstrated on the chart, on 3/9, WLL was up 12% pre-open with material news saying that they, WLL, were looking for a buyer with STO and XOM as possible suitors. I took note of this for many reasons and the first being that any stock in any sector with material news that lifts a stock 12% is stock on my radar and I also used this news as a gauge for some type of “floor” in crude oil so I took special notice to see how the stocks in the group that trades with WLL (SWN/MUR/NFX) reacted as well or if this was a onetime rumor or sector anomaly.
So that day, WLL hit a high of $40 and closed slightly above $38. Once again hardly a solid rumor based upon WLL’s price action and also of the price action of those in the sector. Also noting that after the $40 high on 3/9, WLL a few days later hit a low of $34.50 and back to the price where this all started. That’s how WLL acted on an emotional level.
A stock that was $90 a year ago can’t sustain a rally even on a buyout rumor, which may or may not come to fruition but even on short covering alone, one would have to admit that the price action was poor. Now on 3/24, Whiting had fundamental news announcing a secondary, pricing 35mm shares at $30 a share in order to pursue asset sales and to most experts, this says WLL has given up on reported efforts to sell the company.
WLL was down 20% on the day on obviously tremendous volume staying near the $30 offering price. My guess here is with the depressed price of crude oil coupled with WLL’s plan to get leaner and meaner I would have to say that WLL will have a hangover for some time.
My point here with these two examples is that these are two stocks that reacted entirely differently to both fundamental news and how they reacted in an emotional way. DGLY remember reported a profit and had its best quarter in 12. Wouldn’t one think that DGLY would’ve reacted, certainly not in the same parabolic fashion, in a more positive manner and thus had funds/investors take note of a company turning the corner again and actually showing something?
Also, as traders keeping in mind that DGLY “has it in it” and is actually capable of making big % moves, it wasn’t to be on a day when it should have…only trading 5mm on a day when it should’ve “had its day”. DGLY went up 6 fold on high tensions and emotional sentiment during the Ferguson riots and then corrected. DGLY should’ve done the reverse, making that huge move with better fundamentals but after their #’s came out, DGLY could only muster an 11% gain. Emotions brought the stock up to $30 and the best quarter in 12 landed the stock at $14. Either way…have to trade it on its day.
Whiting on the other hand did the reverse. When WLL said it was putting itself up for sale, the stock, as mentioned above, hit a high of $40 and was up 11% on the day, noting a weak close as well and that was on a rumor and if I can say an emotional one in hindsight. Going to WLL’s fundamental news of the secondary pricing and asset sale, WLL was down 20% on the day and thus wiping out any technical or pricing gains that came with the sale rumor.
DGLY and WLL reacted completely different in the price action of emotional trading as opposed to concrete fundamental news. Many stocks react in a different way but I may note that those stocks like DGLY that have small floats tend to act way more volatile when in play.
In conclusion, I have to admit that earlier on in my career, when the trading was better, there were more times than I would like to admit when I traded stock and had no idea what they did. I asked questions later so one can say I contribute(d) to the occasional frenzy.
On the other hand, I also admit that I’m not smart enough to disseminate most earnings reports or conference calls (I do try) but with these two stocks, DGLY and WLL, in order to be successful and take advantage of these two very tradable situations, one has to remember the action and reaction of these or any stocks on any particular day whether there is material news or not.