Wall Street firms spend millions of dollars on research.
They send analysts to visit companies, who then build complex models estimating sales, costs and profits. These models are the basis of the firms’ price estimates for a company’s stock.
This process assumes that prices are based on fundamentals, and that investors are sensible enough to only buy stocks that are fundamentally undervalued.
However, the chart below of Signal Advance Inc. (OTC: SIGL) argues against this idea. And it reveals that investors are certainly not rational.
SIGL’s Unreasonable Spike in January
I don’t know what Signal Advance does. And it’s likely the investors who bought and sold the stock in January didn’t know either.
In fact, the stock’s big gain was the result of a misunderstanding caused by Tesla CEO Elon Musk.
How Elon Musk Sparked Signal Advance’s Rally
On January 7, Musk tweeted: “Use Signal.”
Musk was suggesting that his followers use an encrypted messaging app called Signal. It allows users to maintain privacy.
But traders assumed that he meant to say: “Use Signal Advance.”
This company had about $6 million in sales in the last 12 months. It reported a loss of about $5,000.
SIGL moved from $0.60 to a high of $5 on the day of Musk’s tweet.
Two days later, after CNBC noted the confusion and the makers of the Signal app tweeted about the misunderstanding, SIGL peaked at $70.85. At that price, the company was worth more than $6 billion.
Almost two months after the incident, SIGL is still more than 300% above its pre-Musk price.
This stock shows just how irrational investors can be. There was no fundamental reason to buy SIGL in early January.
After multiple announcements from reliable sources noting the confusion, the stock still moved up. It’s hard to understand what buyers were thinking.
Steer Clear of Illogical Stock Moves
SIGL isn’t the only example of trader confusion. News reports indicate this is a long-standing problem.
In 2014, Google announced it was buying Nest. Shares of Nestor, whose ticker symbol was NEST, jumped 1,900%.
At the time, Bloomberg noted the stock rallied “apparently because people confused Nest and NEST.”
Bloomberg added that the confusion was most likely caused by algorithms. “Computers skimmed headlines, saw ‘Google buying Nest,’ and went out and bought NEST.”
Algorithms have improved since then. But traders are still confused about stock symbols.
SIGL is an example of how irrational investors are now. GameStop is another example. Irrational behavior seems to be increasing.
That pattern was seen in 2000. It was also seen in 1929. Irrationality was also seen at other times when stock markets formed important tops.
That said, rational investors should be on their guard right now.
Rather than listen to the talking heads of Wall Street or the irrationality of Twitter, follow along with us in Smart Profits Daily, where rational thought still reigns.
Michael Carr, CMT, CFTe
Editor, One Trade