MSB Pressuring Shorts and Dilling Gaps
1. Filling gaps and market behaviour
@Arrr! there are a bunch of rules of thumb in investment markets to summarize human behaviour. Filling gaps is one of them. I don't pretend to understand all of the reasons people act the way they do and there are many really good books on the subject of behavioral finance which go deeply into this (try Thaler, Kahneman and Taleb for starters).
In trying to explain gap filling or Fibonacci retracement, one-day reversals, classical charting patterns etc we may be risking ex post justification, but I try to understand people's underlying motivations - greed and fear vs hope and regret etc.
I have made this a lifetime study, and frankly I am still amazed at some of the behaviour i see.
To briefly address gap filling, I believe it is because a price moved too quickly (by definition, if a gap was left!) for all the activity to be satisfied that would have otherwise transacted in that gap. People may then be left with regret that they didn't take advantage of those prices - buyers may have been getting ready to buy near the low end but missed out - they'll be there later if the price comes back to the low end. Others may well have been happy to sell at the low end of the gap. Then when they realized the price shot up above their acceptable sell level they join in with a general scramble to get out at prices above those they may have accepted - they would feel bad (more regret) if it went back below the bottom end of the gap, so that's where the selling probably fizzles out and the buyers return.
That's a pretty simplistic summary. Suffice to say it doesn't really matter why, it's just common human behaviour. It doesn't always have to happen, but happens enough to be noticeable. If there's a good reason to leave a gap (like a big positive announcement which changes the nature of the company), then the gap may not fill. In the case of MSB this week I don't consider there was a company changing announcement and therefore any gap was quite likely to fill.
Remember that markets are not separate beings with agendas of their own! Markets neither know nor care if you are in a particular stock or not. They will go up and down anyway and it's up to you to judge the right time to get in or out of a stock.
Short term price moves are related to imperfect people reacting with fear and regret (either of losses or of missing out) and greed and hope. Their reactions are not grounded in calm analysis but on primal instincts.
Many people say "the market hates me" or "the market always steals my money" - they should instead say "I don't understand other people's reactions", or "I think I understand why others are selling or buying and there's an opportunity for me to either go the same way or be contrary".
That decision should depend upon your long term valuation of a company and whether the current price is temporarily above or below that valuation.
Short-term trading is fraught with danger and often turns out to appear fairly random. For me, it is far easier to identify stocks which are a long way below long term value and buy and hold them until they realise the inherent value, or until I can find something else with greater potential upside.
My experience also shows the greatest potential upside in a share is the first decile of the price cycle when the the price starts to rise from an oversold "near death experience" i.e. when the price is ridiculously cheap but nobody has the guts to buy it and the last panic seller has just finished selling; and the second greatest potential is the tenth decile of the price cycle when everyone is piling in to a sure thing and pushing the price way above what I think it is worth - so don't sell out too early!
With MSB, I took the decision around 2 years ago that the price was selling way below my long term valuation if trials, partnerships and management panned out the way I was expecting. Since then, the company's achievements have exceeded my expectations and after I bought in the 140's, I added to my holdings at lower levels and have seen it go both higher and lower than my entry point, however the reward/risk tradeoff is still so high, and so much better than any other opportunity I have looked at, that I haven't been tempted to sell.
I have said before that in over 40 years of investing, i haven't seen a better apparent risk/return opportunity. It may not pay off like we all hope, but my stretch upside is $20 and my downside is $1.50 to $2.
So, I observe the short term technical share price moves (which really just indicate people jockeying for position based on their own hopes, fears and biases) but these moves have no impact on my share price valuation, nor do I try to trade them.
Why should I care about someone else's "pain trade" - the fact that they are losing money, or frustrated with a share price and blaming the company or its investor relations people is immaterial to me. It always amazes me when people judge a company (or a managed fund) based on the price they bought in at and whether they are making a profit or not. The same share (or fund) that is declared a brilliant investment by some is decried as a disastrous disappointment by others. It clearly can't be both at the same time and making investment decisions based on the level of pain you feel due to a historical price you paid is not just illogical, but is likely to cause sub-optimal investment decisions.
I find that good professional fund managers have a different pain threshold to most investors/traders. The good ones recognize that they are operating under uncertainty and are prepared to accept losses as part of the cost of doing business - just as long as they get more right than they get wrong. No losses would indicate you aren't taking enough risk. The decision as to whether to cut a loss or double down depends on your ability to constantly reassess the risk and reward tradeoff of each investment (and of opportunities that exist outside your current set of investments) and either decision may be appropriate depending on how information changes.
Bad investors (be they retail or professional) tend to panic when they see a loss and can therefore make a bad decision. That's not their fault - we are programmed to panic and avoid risky situations under Darwinian natural selection. Most people, when faced with a sabre toothed tiger choose flight over fight - they survive and the people who get eaten don't pass on their risk taking DNA.
Somehow a small proportion of the population are suited to making risky decisions under uncertainty and they actually see a stressful situation (like a big price fall) as an opportunity and can make clear-headed and well reasoned decisions. Their fear is offset by their expectation of a big gain and by their expectation that if this trade doesn't payoff, the next one will. They take advantage of dislocations and share price panics.
In this light, you can see that a dispassionate investor would see a share price falling to fill a gap probably provides a technical buying opportunity. If they believe that long term value is way above the price where the gap fills they use that as a way to improve their average price rather than to panic and sell.
I constantly try to probe people for why they buy and sell to try to gain more understanding of the psychology of investment. It is rare for people to give an honest answer - but you can always learn from such intercourse. That's why I was asking
@Cato what was behind his buy and sell decisions a few months ago - he was good enough to go into some detail, and right or wrong, it gives insights as to how others think and is therefore interesting and useful.
I have a friend who is a professional investor who has traded MSB in the past year - holding throughout in his "investment portfolio" and chopping in and out for small gains and losses in his "trading portfolio". The statistics generally show that well over 50% (and as high as 90%) of traders lose their money or significantly underperform, therefore I don't try to beat those odds and I prefer to invest long term and use pricing opportunities to time my ultimate entry and exit points. It's like cooking a steak - don't keep turning it!
2. Shorts are losing the war
Strong buying continued again today and daily trades early in the New Year have been 2,3 and 4x average daily trades over the past year.
Shorts are valiantly trying to hold the price down, but against this high volume buying the shorts will ultimately fail.
It is only a matter of months before the phase 3 trial results are released for the potential blockbuster indications of Chronic Lower Back Pain and Chronic Heart Failure. The final lodgement of the aGvHD BLA should happen within 3 weeks.
At present the shorts can console themselves with the thought that the FDA has not previously approved stem cell treatments for these major diseases and other trials from competitors have failed their primary endpoints. So, they continue to bet against MSB - but this bet would blow up in their faces if trial results were successful, if the FDA were to approve any MSB products or if any more partnering deals were signed.
So the clock is ticking shorts! You have made a massive mark-to-market loss on MSB in the past year since Xmas Eve 2018, as the share price has more than doubled, yet there are still 24.5m shares short (4.6% of the issued capital) and this has been jerking up and down on a daily basis to as high as 32.4m shares or 6% of issued shares. That's a $A75m short position which is way above the peak back in Feb 2019 of less than $A50m ( short was 41.6m shares or 8.35% of the company, but price was only $1.17).
These are disastrous losses for shorts and the recent desperate selling as they try to hold the price down to $2.30 (while selling as few shares as possible) will soon sink them (in the next few months) if MSB comes good with its trials and partnering deals.
Their shorting invest thesis would then be bankrupt and their bosses will be looking for blood. I've worked in firms and also observed the careers of analysts where this has happened. When management is weak, these analysts/fund managers are given the benefit of the doubt, then given enough rope to hang themselves, then they either leave voluntarily or are sacked and the short is bought back. The loss is blamed on the former analyst and doesn't affect the performance of the new analyst/fund manager if it is done quickly. It is the same dynamic as recently happened when Capital changed fund managers - the new guy has a limited time to "clean up" the portfolio before any losses are attributed to him/her.
When management is strong, this process happens much more quickly. Remember that it was only 4 months ago that the share price was $1.35 (in early August). A good deal of the 70% rise since August has happened over the December/January holiday period. When the bosses return from holidays and the losses on the MSB short are evaluated there'll be some tough questions- maybe then the shorts will be the ones to panic, sack staff, cut positions and drive the price higher!
It's all part of the glories of human behavior and short term inefficient markets!
(20min delay)