First, let’s define hype. Hype occurs when…<\/p>\n
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- Prices overreact to news events<\/li>\n
- These prices run far away from fundamentals – such as profitability and growth<\/li>\n
- Social media activity about the news event explodes<\/li>\n<\/ul>\n
The way I account for hype is by using an alternative data set that tracks social media mentions of a particular stock.<\/p>\n
The key is to wait for a spike in social media mentions and let prices either reject or accept the reaction. When prices diverge from this spike, it’s usually time to get contrarian. And, social media tends to be loudest right at the end…<\/p>\n
In other words, when a lot of people are talking about a specific stock, but the price isn’t reacting accordingly, it’s likely because they’ve all bought it already.<\/p>\n
I compare this to the feeling you get at Thanksgiving… It’s like how even after you’ve eaten your fill, food is still on your mind, but there\u2019s no more room.<\/p>\n
And in finance, when all is known, there’s no more room for new buyers to push prices higher, and nothing left to sell to send prices lower… But that won’t stop the market from talking about it.<\/p>\n
This is what “priced in” really means… There’s no greater evidence of “priced in” than when social media sentiment reaches a crescendo. <\/p>\n
Sidestepping the Hype<\/strong><\/h2>\n
“Green New Deal” stocks are a good example. After Biden’s victory, the global green energy push accelerated… And people began to assume that companies positioned to supply clean energy would benefit.<\/p>\n
Take Plug Power (PLUG). It spiked 331% since the election through mid-January. <\/p>\n
But the problem was, it ran away from fundamentals. Its forward-looking price-to-sales ratio<\/a> (P\/S ratio) reached 76. To put that into context, of the nearly 3,000 stocks listed on the New York Stock Exchange and Nasdaq, only 90 had a higher forward P\/S ratio… And of those, PLUG rose 2x more than any other name since the start of 2021.<\/p>\n
This is where hype rears its ugly head and traps investors. All three criteria – news events, prices running too hot, and a social media explosion – were met on January 13… Setting up a “hype profits” opportunity.<\/p>\n
That day, news came out about the PLUG partnership with French automaker Renault to supply hydrogen-fueled delivery vans in Europe. This sent the stock into overdrive, but it failed to close higher than where it opened…<\/p>\n
Check out the chart below…<\/p>\n
![\"\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202105\/20210505-mm-01_spt568.png\")
<\/p>\n(Click here to expand image)<\/a><\/p>\n
Note that the chart above is a candlestick chart.<\/a> These charts show us where the stock opened \u2013 and where it closed \u2013 for each period (the ends of the “candle”), and the high and low of each period (the ends of each “wick”). A black candle means the asset traded lower on the period, a white candle means it traded higher.<\/p>\n
This chart shows social media mentions of PLUG spiking 156% on January 13… Just as momentum started to fall.<\/p>\n
The next day, it opened 4% lower. And despite the partnership news, PLUG has fallen 62% since.<\/p>\n
Notice how social media references have come to a crawl as prices have collapsed… That’s also a behavioral aspect of trading. <\/p>\n
Right now, I’m actually looking for social media activity to pick up and trigger a new long position. It’s fallen far enough… Plus, no one’s talking about it anymore. That’s a good sign.<\/p>\n
Any additional weakness would likely come from a general market selloff, which I would view as a buying opportunity.<\/p>\n
Plus, its median analyst price target remains above $50, as it did on January 13. The difference is, with the stock trading for less than $25 now, there’s more than 100% reward for the risk you take at current levels… As opposed to when it was trading at $69.50 on January 13.<\/p>\n
But this system can also be helpful when trading the broad market…<\/p>\n
Profiting From the Dislocation<\/strong><\/h2>\n
For example, Joe Biden addressed the Senate on April 28, unveiling more plans to spend trillions of dollars on new government programs. <\/p>\n
In general, this spending is good news for the broad market.<\/p>\n