Dramatic Reversals: Up, Down, Up Again

Up one moment, down the next — and up again, before you know it. That’s the way of it with the stock market in general and with individual stocks in particular. But just what is an investor to do about it? To help you become a better-informed investor, Spiking now takes a look at reversals: what they are, as well as a few examples at home and abroad.

But more importantly, we’ll be tackling what investors ought to do in the face of reversals, dramatic or otherwise. If you find your favourite stock spiking erratically, or extremely within a short period of time, what is an advisable course of action? To track the performance of stocks on the Singapore Exchange, use the Spiking app today.

Reversals in Review

Investopedia defines a reversal very simply as a change in the direction of a price trend. This change can either be positive or negative — an “uptrend”, or a series of higher highs and lower lows, can change or “reverse” into a “downtrend”, or a lower highs and lower lows — and vice versa.

Reversals frequently take place during the trading day and can happen in the blink of an eye, but they can also happen during a number of days or weeks. They’re usually caused or happen after a company makes an announcement or some significant news event occurs to affect a certain stock.

Investors, brokers and stock market experts keep an eye out for reversals because they bear on decisions to buy or sell.

Here are a few overseas examples of dramatic reversals from Julian Close writing for the Market Intelligence Center:

· YY Inc. is a leading Chinese social communication platform. A little before April in 2014 its stock price hit USD90 on the Nasdaq, yet, it dropped between April and July to a little over USD50. Yet its price soared to almost USD100 just before October.
· Phillips 66 is a company that resells and markets refined petroleum products. Just before 2015 kicked in, Phillips’ stock price was a little over USD70 on the New York Stock Exchange. Yet it fell below USD60 not long afterwards. But its price climbed back to almost USD80 well before April rolled round.
· Go Pro Inc. develops and sells mountable and wearable cameras and accessories. Between July and October 2014, Go Pro saw its price rise to almost USD50, sink to below USD40, and soar to a high of almost a hundred dollars on the Nasdaq.
· Fitbit Inc. is involved in wearable fitness-tracking devices. Fitbit’s prices between July and October 2015 went from above USD47.5 down to less than USD45, then back way up to more than USD50 on the NYSE.
 
 Another example described by Kevin Kelleher in the February 2015 issue of Time, is eBay (though the reversals took place over a longer period). eBay was selling at a high of SGD59.21 in 2004, but by 2009 it had plummeted to lower than USD10. However, by 2014, eBay shares had rocketed back up to as high as USD59.70 by 2014, and were trading at about USD55 per share the following year.

Closer to home, the Straits Times reported on how shares of the Blumont Group, Asiasons Capital and Liongold Corporation skyrocketed in October of 2013: Blumont had gone up by 92%, Asiasons soared by 103%, and Liongold leapt by 90%. The SGX had suspended trading for the three stocks earlier that month, after a series of “dramatic reversals” earlier that year. Two weeks later, the Exchange announced that it had lifted the suspension. Download the Spiking app now for up-to-the-minute SGX updates.

Investors and Reversals

Knowing that reversals, much like stock market crashes (which Spiking has discussed in a previous post: https://spiking.com/blog/stock-markets-crash-learn/) can and do happen, investors would do well to remember that at the end of the day, share price isn’t everything. As Wayne Pinsent says on Investopedia, investors shouldn’t be fixated on share price alone, because share prices can change dramatically. It is a company’s fundamentals that investors should focus on.

If a certain stock is in the middle of a downtrend, one might try analysing the stock’s previous performance over an extended period. In Investor’s Business Daily, Justin Nielsen says reversals are a chance to buy a stock which has hitherto had strong performance, that is dropping during an uptrend.

Mr. Nielsen went on to cite American technology company, Nvidia as an example, pointing out that while the stock had a reversal last March, it was in the middle of an uptrend. He also noted that Nvidia’s price performance in the past year showed that it was not a weak stock freefalling toward rock bottom.

With that, instead of panicking with the advent of a negative reversal, an investor would do better to stay “steady as she goes”. Writing for The Columbian, Malcolm Berko focuses on how every stock market downturn is temporary, even if investors feel like it could go on forever.

He explains that while the stock market can’t be forecast like the weather, it does have weather-like rhythms or cycles. Quoting a Motley Fool analyst, Mr. Berko says stock market data from as far back as 1871 shows that the S&P 500 went up by an average of 47% every five years. Every time the S&P 500 fell by 20%, the five-year returns were 61% on average; a 30% drop meant an averaged 78% five-year return, and a 40% drop had an average of 102% in returns, in five years.

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Sources:
http://www.marketintelligencecenter.com/2016/02/01/these-fallen-angels-are-about-to-rise-again/3/
http://time.com/3695714/ebay-rise-and-fall/
http://www.straitstimes.com/business/shares-of-blumont-liongold-asiasons-surge-after-sgx-lifts-trading-restrictions
http://www.investopedia.com/terms/r/reversal.asp
http://www.investopedia.com/articles/stocks/08/stock-prices-fool.asp
http://www.investors.com/research/swing-trading/buying-early-but-buying-smart-with-stock-reversals/
http://www.columbian.com/news/2016/jan/31/berko-markets-may-fall-but-rise-again-stay-the-course/