Sometimes, Stocks Go To Zero


GT Advanced Technologies – the company behind one of the hottest stock market stories in the past year, the next big growth name that was supposed to make sapphire glass for future Apple products, filed for bankruptcy this week.

A strong bull market in solar stocks, coupled with a multi-million dollar contract from Apple, catapulted GTAT from $4 to $20 between July 2013 and July 2014. Apparently, Apple turned out to be too big of a bite for $GTAT and they could not deliver to their contractual obligations. The result – Chapter 11 of what used to be an almost 3-billion dollar company just two months ago.

Trends start and end all the time. If you don’t know why you are in a stock, you won’t know when it is the right time to exit. If price was the reason to buy a stock, price should be the reason to sell it.

There was absolutely no reason to own GTAT before its bankruptcy announcement. It was in a well-defined downtrend with price trading below all its major moving averages – 20-day, 50-day, 200-day. This is why following price matters. You could have the greatest growth story in the world, but until the market agrees with you, you cannot make a penny. Market’s way of agreeing with you is by sending your stocks to the 52-week high list or at least to new 50-day high from a proper technical base.

Financial markets constantly discount events that have not happened yet. As a result, they sometimes discount events that will never happen. A stock could quintuple in a year based solely on investors’ speculations and expectations for future profits. The stock market might be forward-looking, but it is not stupid or naïve. It constantly looks for feedback that will confirm its discounting of the future. When it gets tired of waiting or it doesn’t receive the expected feedback in terms of earnings and sales, it quickly reverses in the opposite direction.

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