What Were Institutions Up To With Micron Technology?
- MU's short volume increased sharply surrounding institutions’ upgrade and downgrade announcements.
- MU's stock prices dropped 16% in response to downgrades and jumped 10% in response to upgrades.
- More importantly, short volume increased prior to both upgrade and downgrade announcements.
- We discussed one rational explanation and left the rest to your imagination.
By K C Ma and Matthew Sweeney
Micron Technology (NASDAQ: MU), a bellwether stock for the semiconductor industry, has been long known to be affected by institutions' analyst recommendations. In this article, we examined short sale activities surrounding the releases of institutions' upgrades and downgrades on MU. The institutions in this study included Morgan Stanley, Baird, Nomura, Mizuho, Cross Research, Summit Redstone, and Susquehanna whose analyst reports have been capable of exerting market-moving impacts. We like to explore the information content that MU investors can use from decisions of these institutions' rating changes.
Upgrades and Downgrades
In order to isolate the “clean” market impact, we selected the downgrade reports only if there were no major ER events and no other major analysts’ reports one month prior. Furthermore, the rating changes needed to have a price impact, which verifies the existence of new information. Accordingly, the four downgrade and five upgrade reports were identified (Table 1-A and Table 1-B). Since MU is the stock in interest, the market data including daily short sale and price were collected for the 30-day time period surrounding the report dates. The following are the findings on the changes in market activities around the dates.
Since these large, influential institutions issued the downgrade reports, it is expected that resulting bearishness will encourage short sale activities. On average, the short volume increased to 5 million shares at the release date, compared to less than 1 million in the regular period (Figure 2). There will be an obvious selling pressure on MU shares following the release of downgrade reports, especially from the well-known investment banks. The short volume picked up around 5 million over the days immediately following the report. Because of the selling after the downgrades, MU's price dropped from $18 to $15, approximately a 16% loss. To be clear, up to this point, we are only showing the case that these investment banks’ reports carry market-moving information. However, this is not the reason why we wrote this article.
The real question here is whether there were any abnormal market activities prior to the downgrade releases. Unlike scheduled earnings reports, the timing of the release of individual analyst recommendations is unknown to the public (market). Investors should not have private information to act on before it becomes public. Therefore, there should not be any irregular trading prior to the analyst recommendations in an efficient and legal market environment.
Consequently, we were puzzled, yet not surprised, by the fact that there was clear excessive selling prior to the downgrade releases. On average, short volume increased from less than 1 million shares five days before to 8.54 million shares one day before the announcements. In addition, MU stock has already been sold off two days prior to the downgrade announcements.
A Rational Explanation?
In order to explain the “pattern” rationally, we will start with an open mind. As Wall Street analysts may not always be informed, they often obtain information signals from various sources in order to formulate their recommendations. As short sellers are often perceived to be more aggressive risk takers with better information, their short trades become a proxy for quality private information. If analysts incorporate short sellers’ trades into their recommendations, it will create the appearance that short trade volume will precede the downgrade reports. On the other hand, even if information in the short trades was incorporated into the decision process, it is unlikely that analysts will only use limited amount of data, i.e., 3 days’ worth of short trades.
We present the same data for the five cases of MU upgrades (Figure 1). While MU stock jumped from $18 to $20, a 10% increase upon institutions’ upgrades, it is more surprising that the short volume also increased 3 weeks before and 2 weeks after the announcements. At first glance, we were puzzled by the apparent “inconsistent consistency” of increasing short activities regardless of upgrades or downgrades. We are less concerned, though, with the higher short sale activities following upgrade announcements. This is because investors may have increased their short sale if they believed that the stock has been overreacting to the upgrade announcement.
On the other hand, we have to confess that we were wrestling with why short sale increased prior to an upgrade announcement. If analysts were truly “behind the curve,” they should not upgrade the stock in light of heavy short volume.
Institutions Change Holdings Against Their Own Recommendations
One way to examine the validity of the rational argument is to look at its logical consequences. If rating recommendations were made on a logical basis, the institutions should have decreased their holdings in MU after their own downgrades. However, virtually all institutions who downgraded the stock actually increased their holdings afterwards (Table 2-A). Similarly, Susquehanna decreased its holdings after upgrading MU (Figure 2-B).
Since the somewhat inconsistent results cannot be explained by a rational explanation consistently, it is likely that there are some other non-economic factors affecting the short sale activities. At this time, there is not enough evidence to identify the true causes of the MU market activities around rating changes. But one thing is sure that short sales did increase regardless of the nature of the rating changes and it did cause a traceable market impact. Investors should consider the idea that "if you can't beat them, join them."
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
We will be glad to provide all the data used in this study upon request. If you like this article, I would suggest that you follow my student Matthew Sweeney.
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