Last week I posted this Net Change and Volume Up Scan article saying that $DRYS was going to be killed soon. $DRYS had just performed a 1/15 split so things weren’t looking so good.
California legalized marijuana on November 8, 2016. A rumor soon started circulating that California will soon become the Marijuana export hub for the United States. Even though its just a “rumor”, it sent $DRYS to almost $45.00/share today.
$DRYS has gone from a gracious $4.00 to over $42.00 within just a few days.
This reminded me of Truth and Sentiment. The theory is that if something is known to be true and everyone knows it, the outcome will probably be reversed.
I knew for sure that $DRYS was going to killed.
Everyone else knew for sure that $DRYS was going to get killed.
As shown above, the exact opposite happened.
Most traders were short-selling this stock just waiting for the price to drop. Smart money looked at the financial statement and knew this stock was garbage. They waited for the right time and started buying it up.
This is a classic Short Squeeze.
Everyone loaded up on shorts. When this stock started climbing, Brokers began automatically lowering margin rates and kicking people out of losing trades who were using leverage. Some traders bailed out using Market Orders which only added fuel to the raging fire.
Truth and Sentiment
I originally heard about this Truth and Sentiment theory from Timothy Parker.
I still have this graphic hanging on the wall in my office.
Take a true statement, like $DRYS is in financial trouble and the stock should be plummeting. It was widely held and believed the stock would come down soon.
Instead of dropping, $DRYS stock price did just the opposite.
Hindsight is always 20/20 and no one can ever predict something like this. I guess the moral of the story is to try and spot setups like this early.
Here’s the checklist.
- Catalysts – Whats the story line pushing the stock?
- Former Runner – Has the stock ran recently or is it well-known?
- Something Obvious – Everyone knows this particular fact.
- New Owners – Was the stock recently bought up or shorted heavily?
- Sentiment – Everyone at once, leaning in one direction.
When all of these items line up, there’s a good chance most people will get it wrong. A lot of skepticism goes along with theories like this. I just know that when I see huge runners like $DRYS, $MGT, $FXCM, $GENE, $LAKE, $DGLY, they all fit the bill.
What are your thoughts? Use the comments section below.