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BlackBerry: Beware Of The Bears

|Includes:BlackBerry Ltd. (BBRY)

When the price of a stock is volatile, and moves drastically on seemingly irrelevant news, there is always much comment and speculation about whether or not the price is being manipulated. BlackBerry (NASDAQ:BBRY) is a prime example of a stock which is extremely sensitive to news, and which is very volatile and which seems to be vulnerable to manipulation.

If the stock is being manipulated for profit, how can this be happening?

It is always possible to move the price of a stock by placing a large order. The table below shows the typical early morning bid and ask orders for BlackBerry. The figures in the left column are buy orders, in job lots of 100 shares. The right column lists the sell orders and the centre column is the bid/ask price.

Bid

Price

Ask

     
 

15.00

145

 

14.99

22

 

14.98

7

 

14.97

12

20

14.96

 

47

14.95

 

132

14.94

 

19

14.93

 

21

14.92

 

45

14.91

 

430

14.90

 

73

14.89

 

18

14.88

 

53

14.87

 
Click to enlarge

If someone places an order to sell short 100,000 shares (i.e. 1,000 lots) at market price, that order will be filled from the bids in the left column. The share price will drop from 14.97 to 14.89, and the seller will have sold 100,000 shares for an average of $14.91 per share.

At this point, the seller has driven the share price lower. The lower price may also have triggered some stop loss orders, and put some additional sell side pressure on the stock as day traders recognize a downward swing and decide to place their own sell orders. However, there is nothing illegal about this. The change in share price is simply a reflection of the supply and demand for the shares. There is also nothing to be gained by this action. The short seller of the shares can close his position by buying back the 100,000 shares, but that will drive the price higher, so there would be no net gain in doing so.

To profit from manipulation of the share price, there has to be a catalyst which will keep the price down, while the short seller covers his position. The stock price of BlackBerry is extremely sensitive to news, so the catalyst could easily be a piece of bad news trashing the stock. The news does not necessarily have to have very much of a basis, because by the time that news been digested and refuted it has already spread across the internet and has been summarized, rewritten or repeated by any one of a dozen or more news services such as Barrons, Forbes, Wall St Cheat Sheet etc.

Take a look at the price graph for BlackBerry for May 6th and 7th.

(click to enlarge)Click to enlarge

On Monday 6th, trading was normal, volume was light and the shares traded in a relatively tight range. On Tuesday morning the price dropped sharply in heavy trading, an obvious sign of a "bear attack" which continued until about 10.30. The share volume during the first hour of trading is 2 to 3 times the normal volume, equivalent to about 10 million shares above normal, and enough to push down the price by about 5%. At about 11.00, Seeking Alpha carried a report from research company, Cleveland Research. The report claimed that build rates were being cut from 10 to 12 million units per quarter, down to 6 to 8 million units per quarter. I don't know where Cleveland got the information that build rates were ever at 10 to 12 million per quarter, because build rates after the claimed cut would still be significantly higher than any previously published forecasts. A long time BlackBerry bear, James Faucette of Pacific Crest chipped an article trashing BlackBerry sales, while providing no basis for his conclusions. However, the harm had been done. The share price stayed down for the rest of the day, allowing the short sellers to cover their positions by slowly trickling buy orders onto the market. An uptick in price and volume at the end of the day could be a result of the shorts covering their final positions.

Take a look at the BlackBerry price graph for the last month.

Click to enlarge(click to enlarge)

Similar bear attacks happened on May 1st, when the bears were presented with a golden gift from CEO Thorsten Heins who more or less closed out any probability of BlackBerry re-entering the tablet market in a meaningful way.

On April 25th, the bear attack was accompanied by another doom and gloom report from our friends at Pacific Crest, aided and abetted by a report from Wedge Partners.

April 11th was the day of the now infamous claim by Detwiler Fenton that Blackberry returns were exceeding sales. That claim has precipitated an SEC investigation, which for the moment has at least silenced one of the sources of the bear attacks.

Trading patterns are similar on each of these days, the price drops suddenly on high volume early in the day, the news hits the wires, the price stays down on lower volume through the afternoon, and there is an uptick on higher volume at the end of the day. Afterwards, the share price always recovers and continues its uptrend.

The winners on the day are those who sold the stock early, and bought back during the afternoon. The losers are those who sold on the so called "news".

It is also possible to carry this same maneuver in reverse. The price can be driven up by a large buy order, with a good news report to follow, and then the shares can be sold on the news. However, this type of manipulation is more difficult. Human nature is such that it is easier to create panic selling then panic buying, and no-one has ever placed a "stop gain" order. The reverse trading pattern does not show anywhere in the BlackBerry charts. If the stock is being manipulated, it is being done on the sell side.

I don't think it is illegal to conduct market surveys, or to publish opinions based on those surveys, or to buy and sell shares based on those opinions. Nor is it illegal to inform your private clients of the results of your research before you publish that research. If the research is bogus, then that would be a different matter, and I am sure there would be legal repercussions, but that would be very difficult to prove.

The small investor can defend himself against these actions by ignoring the analysts who turn out to be wrong more than they are right, and buying on the dips.

Disclosure: I am long BBRY.

Stocks: BBRY