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Summary

  • It's not the first time we see rampant speculation in a sector and it will not be the last.
  • Professional traders and veteran speculators know all too well how to exploit herd mentality.
  • As in the case of many blue chip stocks of the last decade, such as Microsoft, those who bought at the top may take many years to break even.

It never ceases to amaze me how many stocks and sectors, for no fundamental reason whatsoever, go on a crazy roller-coaster ride, giving mindboggling profits to some, and losses that will never be recouped to others.

One such sector has been the fuel cell sector, as mostly defined by stocks such as Plug Power (NASDAQ:PLUG), Ballard Power Systems (NASDAQ:BLDP) and FuelCell Energy (NASDAQ:FCEL).

The fuel cell sector in many aspects resembles the 3D space. It is a sector in which the fundamentals are out of sync with reality, constantly in the news, and with many speculators trying to outsmart the herd (please consider:3-D Stocks: The Sector's Nonperformance Is A Very Bad Omen).

Like the 3D space, the Price/Sale ratio of the space is out of this world. Plug Power trades at a Price/Sales multiple of 23, FuelCell Energy at 3.6 (not bad) and Ballard about 8.5. Please note, these figures are after the recent slide.

As for profits, there are none (yet) and the sector has had to constantly sell shares to survive.

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PLUG Shares Outstanding data by YCharts

But the sectors about-face is not just about fundamentals, it also has to do with the art of speculation. And guess what, professional traders and veteran speculators know all too well how to exploit herd mentality, which is exactly what they did in this case.

One rule of thumb that speculators look out for is extraordinary volume after a long run. Basically, when uptick volume reaches a climax, it means that fresh available buyers have been exhausted.

Over the past 6 trading days (today not included), the three main speculation play stocks of the sector are down by almost 50%. One of the reasons for this (I think), is anyone who had any shares on their hands dumped them and then some.

Let's see some charts:

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Please notice the spike on the charts (they are almost all identical). The magic date is March 14, 2014. On that date, volume spiked to unimaginable levels, and rampant speculation among the young and the mindless -- those who knew nothing about the space nor its fundamentals and simply bought on impulse -- broke loose, and speculators who know how to play the herd made out like bandits.

What followed has simply been a massacre, with no end in sight yet.

And just to give you a sense of the wild speculation that has accrued, on that day, Plug Power traded 243 million shares with 103 million share outstanding, FuelCell Energy traded 196 million shares with 253 million share outstanding, and Ballard traded 75 million shares with 110 million shares outstanding.

As I see it, veteran speculators invested in the space, correctly identified the wild speculation that was going on, and that the herd was buying, and sold everything they had and then some.

When will the bleeding stop?

This is hard to tell, because you cannot play the sector based on fundamentals. My advice is to be on the lookout for the opposite of what happen at the top. When we see crazy volume to the downside, that might be a sign of selling exhaustion.

When we see the herd selling with the same passion, as when it was buying at the top, then it might be safe to get in the Fuel Cell space again.

So if you are a speculator in the space, be on the lookout for very high volume to the downside (preferably with a close above the previous day). While not a guarantee you will buy at the very bottom, you will probably be very close.

Source: Why The Fuel Cell Bubble Has Popped