Here's the Lesson:
People here who are bullish need to look up the word Intrinsic Value. OK, here you go... The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.
What happened around the week of November 17, 2008?
When the forced selling came in it didn't matter what the Intrinsic Value was for the stock. The mutual funds, margin call sell outs, and Hedge Fund's were forced to sell at "whatever" the price was. I'd call it CAPITULATION. The Key words "FORCED" and "CAPITULATION". Your opportunity to BUY! View it like a forced sell on your neighbors house if it had to be sold in one or two days. You are not going to get Top Dollar by any means but it will sell for a deep deep discount, right?
OK, then what happens?
Well, as a former WS trader that has seen this many times, the "traders" / "Market Makers" drop the Bid Price and keep dropping it to bring in the shares at the best price. If there was massive selling say at $15, the MM's dropped to $14, 13, 12, 11, 10, 9, 8, 7 ,6 ,5 ,4....you see?
It doesn't mean that the price is the True Value. Its just where the MM's place the Bids until a buyer steps in who has $$$$ can take some heat. No one wanted to take any more heat as bids faded daily. People were scared. Again a buying opportunity to "leg" in as the stock kept falling....averaging in along the way.
So you might ask...What happens when the market ticks up and gets stronger? Well, as in the case of DryShips - DRYS, the MM's dont want to keep the Ask price or offer at $4.00 so they back away just like the reverse of the drop. The MM's move from $4 to $5, 6, 7, 8, 9, 10, then up to $20? $30? They keep moving up or lose their high cost shares at $5.00, 6, 7?? No way.
Anyways, the hard drops were done to get your shares too. This is how GS and Cantor make $100's of million in trading stocks every year! Get it? Yeah, its real. It happens all the time! Called, backing and filling....
My prediction based on past trading experience of over 25 years:
Look for a fierce bounce in the coming weeks as the smart money figures out that many stocks are trading well below their Intrinsic Values and we should get a bump from the worldwide stimulus packages too. Also, expect other Hedge Funds like George Soros and Paul Tudor to stop the liquidations at these absurd prices. George's traders were massively selling and he fired several of them. Rightly so. Go read about these HF's today.
OK, Have a good day. I hope that this was helpful? Be good.
