The Trading Characteristics Of Market Manias

Includes: BLDP, P, PLUG, SLV, WMT
by: John Gilluly


A simple exposition of manias and what they have in common.

Analysis of the Nasdaq, tech, silver, and fuel cell manias.

A comment on Plug Power's new Wal-Mart Contract.

A true story from the 1998 tech mania.

I'll begin with a simple illustration from the playground: the teeter-totter. As we all know, it's a long board with seats on either end oscillating up and down (or back and forth) over a single, central, pivotal point: the fulcrum.

As long as there are children on both sides of the pivot, the action is easy-going: they give a little, take a little. But when a herd of kids suddenly piles onto one side, children on the other side are left high and dry; that is, until the heavy side jumps off and they come crashing down to the playground floor.

Markets can do this too. The two sides of the teeter-totter are fear and greed. Normally there's a give and take in a sine wave that's filled with motion, but circumscribed. Oscillations increase dramatically during overbought rallies and oversold corrections. But when the action gets out of hand and locked up on one side, a mania can ensue. This applies to stock market crashes as well; for example, when a crescendo of pessimism becomes so all-consuming that investors want out (not in) at any price.

In manias, price discovery ceases, because there are so many individuals piling onto one side of a trade. Getting "there" - at any cost ($) - becomes the only goal. The underlying security or commodity becomes irrelevant. And as the profit ($) grows, the return is so compelling that piling-on becomes a self-fulfilling prophecy.

Manias can be short-term, lasting just a few months. They can be a craze that lasts 3 or 4 years (like the dotcoms); or even longer - like the real estate manias that seem to cycle in and out of the United States like clockwork .

Stock market manias often center around inventions or technology that purport to fill a messianic service - to revolutionize the world in some way. Manias also can also develop out of commodities: like gold, silver, or oil. During the Nasdaq mania of the 1990s, the desire was for anything tech, especially fiber-optics or semiconductors. In 2011, it was silver.

Today it's alternative fuel systems [e.g. Ballard Power Systems, (NASDAQ:BLDP), and Plug Power, (NASDAQ:PLUG)]. These two seem to be morphing into the mother-of-all-manias.

High-frequency traders can easily spot manias-in-the-making and chase after them like a battalion with its machine guns blazing. Thousands of 100 share trades are fired off in rapid succession and push a stock relentlessly in one direction. It doesn't stop until it's over; it happens all the time, and it's all legal. 80% of today's market volume is created by high-frequency trading.

High-frequency traders are agnostic about the stocks they choose. They pyramid profits one penny at a time. They play small-ball to the max. And they especially like short squeezes, because margin borrowing is required to short a security, but not to buy it. It puts them at a distinct advantage to short sellers. (More on this later.)

There's a predictable pattern with manias. The price goes up, the volume goes up, the word gets out, and the sky-high pile-up reaches higher. A manic fever enters the trading. At the peak, the stock is trading its entire float (all available trading shares) in a single day.

Because the financial crisis changed the perception of how the public views Wall Street, brokerages will now step in and end one of these manias if they go too far. When people lose money in a mania, they bring along a lawyer or the Feds to figure out why, and nobody in the business wants that.

In 2011, at the peak of the silver mania, trading exchanges worldwide raised their margin requirements for buying and holding the silver metal twice in a single week. Traders had to sell their positions or risk margin calls.

The reason for the margin hike became obvious. The cost of silver and gold had risen so precipitously in the previous months that it was affecting everyday businesses that used the commodities for industrial purposes.

And during the silver mania, an investor could hear all kinds of stories about the rarity of the metal, the scarcity of its resources, and the "time to come" when life as we knew it would never be the same.

The reality was that investors wouldn't let go of the metal. There was plenty to be found if the doors of the bullion storage at SLV could just be opened.

I remember the final night - a Sunday night - when the last of the margin hikes was announced. The metal had rallied 10% overseas, and traders were incredulous. But that was the night it cracked, too. It's been down ever since.

(Silver, 2009-11)

Now onto PLUG and Ballard, stocks that seem to go up double-digits daily.

PLUG traded 441 ML shares this week, 5x its float in 5 days, and rose 78%. Approximately 91% of its daily trading volume this week (401 ML) was retail investors. The other 9% might have come from institutions and mutual funds, but they own a small part of PLUG.

On another note, I called my brokerage Friday and was told that PLUG was no longer marginable. If that's true for other brokerages, then investors on margin will have to abide by the new maintenance margin and reduce their positions or risk a call.

Ballard's first parabola was 20 years ago when the stock rose from $3.84 to $105 (and back again).

(BLDP 1995-2000)

(BLDP: 2/2013 to 3/2014)

Today it's at $5.28/share, up from 70 cents/share a year ago. It's up 52% for the week. Although Ballard's weekly volume was excessive (112 ML shares, or 1x the float), it was nothing like PLUG's. Ballard has little inside ownership (7.22%) and institutional holders (15.22%). I estimate that 85% of its daily volume is traded by retail investors.

Now let's look back at the Nasdaq mania of the 1990s. JDS Uniphase (JDSU) was a poster child back then for the tech revolution that swept the world: Internet delivery through Fibre Optics. Although the underlying promise came true, there were bankrupt companies and many busted traders 3 years later when the Nasdaq was 80% lower. JDSU traded above $1,100 in 2000. It's $13.79 today.

To give you an idea of the magnitude of the Nasdaq mania, the entire Nasdaq stock market [COMP] tripled between October, 1998 and March, 2000 (15 months). The Composite rose from 4,000 to 5,000 in 4 weeks.

There were armies of retail day-traders (some in their pajamas), following leaders like Michael "Waxie" Parness in his Trendfund chat-room, trading the Nasdaq like guerrillas. Internet and tech analysts were the toast of Wall Street. The public hung breathlessly on their every word. It seemed like you couldn't miss with tech. The Nasdaq was a pinball machine. Pull the plunger and watch the silver ball fly. Every Friday afternoon, mutual fund Americans watched Louis Rukeyser and counted up their coins to see much more they were worth that week. Bears were verboten (not allowed to speak).

One of the favorite ploys back in the day was the secondary offering. When a mania is in full glory, secondary offerings don't dilute the shares. They feed the fire. And the companies and traders knew that. So did the underwriters. It was easy money for those involved. As soon as the secondary was announced - just announced - the anointed stock would jump out of the gate like a thoroughbred, begging traders to catch her and run the price up.

That's why the recent secondary $22.4 ML offering by PLUG caught my eye, its second in two months after the first $30ML offering in January. The secondary was announced, the analyst plugged it, the stock went up 18%; then the secondary priced at $5.74, and the next day the shares rose 30% higher to $8.27/share on the spectacular volume of 125ML shares. It was perfect choreography. PLUG was cannon-balled right into the close by high frequency traders.

Which leads me to a final comment on manias - the messianic way a stock du jour can be touted as financially viable. There is this sense that "the sky's the limit" (at least the cash limit). Buy it, and you'll be doing something good for yourself and good for the world.

If investors are fortunate enough to make a quick buck in PLUG, I don't think it is alternative energy consciousness that's driving their speculation. It's profits.

The big story this week for PLUG was an enlargement of their existing Wal-Mart (NYSE:WMT) contract.

Are investors aware of Wal-Mart's reputation for squeezing suppliers, hectoring manufacturers and paying their employees subsistence wages?

At the time when CEO Andy Marsh was negotiating a contract extension with Wal-Mart, his firm was facing a Nasdaq de-listing. What kind of deal is a gorilla like Wal-Mart going to give a minnow like Marsh when his company is on the ropes?

Not much, by my pencil, unless Wal-Mart has a charity-fund devoted to alternative energy producers. PLUG's big story was Wal-Mart on the marquee. Not what Wal-Mart was paying them. But what the Wal-Mart story did do for PLUG, however, was provide solid advertising for two secondary offerings totaling $52ML, which means the company survives for another year and buys more time to bring itself to profitability.


I'll close this article with a true story from the heyday of the Nasdaq mania. It involves (OTC:PMKY), trading today for 3/10 of a penny. I think the story is illustrative of our current mania.

The day was Friday, November 27, 1998, the small trading day after Thanksgiving. I had the morning off and was trolling the Internet for tech stocks. I wanted to buy my wife a car and was hoping for a quick trade. I looked for the volume leaders, and the name PinkMonkey popped up on the screen. PinkMonkey? Who's PinkMonkey?

I checked the message boards and the chat rooms. Anyone know anything about PinkMonkey? Nobody knew. But the price was rising rapidly. It had opened at $8.00/share that morning, up from $5 the week before, and already it was at $10/share. I shorted a little bit; thinking it was no big deal. It went to $11/share, and I shorted some more. I did the same at $12 and $13, but then it started to rise like a rocket and blew past $15. I got worried. Real worried. The Friday was a shortened trading day, and I would have to cover in just a couple of hours. The loss could be spectacular.

WHAT was driving this stock? And what was PinkMonkey? Some tech outfit with a cool name? A buyout? The volume went ballistic. PinkMonkey was now trading millions of shares. It looked like it was going to the moon. At $18/share, the absurdity of it all hit me, and I put on the biggest short of my life. Yes, it was stupid, but how could an unknown stock double in a day, and nobody know why?

That's when someone frantically called the company. The CEO had come in that morning to straighten up some papers on his desk and had picked up the phone. He was oblivious to what was going on with his company in the stock market. As it turned out, PinkMonkey sold study guides and literature summaries for kids k-12. It wasn't a tech stock after all.

When asked what he thought of his shares trading for $18/share, he gasped and said he couldn't think of a reason in the world why they should be that high. I read the message from the trader who had called him - in a chat room - about 30 seconds before the first sell order for a million shares at the market flew across my screen. There were almost no bids, just sells. By the close, the stock was under $10.

I don't see a difference between the way Plug Power is trading and what I experienced that day. Some sagacious wonk picked an unknown stock and starting accumulating it. He pushed it all morning. He knew the inside story of the company would be unknown, and likely unavailable that day.

That's when the retail traders picked it up and ran the ball for him, all the way up to $18. I don't know if it was a single individual or a consortium of very savvy players who got the ball rolling, but they knew how human nature and ambulance-chasing worked, and they pulled off a spectacular short-squeeze.

Investors in PLUG have had months of this, almost on a daily basis, and I don't think this kind of stock action is connected with PLUG's fundamentals. To the contrary, I think it is the careful herding of sheep by some very clever dogs.

Disclosure: I am short PLUG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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