If A Stock Drops 5% for No Reason, It’s Being Manipulated

Disclaimer: This post does not constitute financial advice. Do your own due diligence before making an investment.

If you invest in undervalued companies with great prospects, then you’ve probably noticed their stock price can be volatile.

This is not an accident.

This is by design.

In this article, we talked about the concept of gems. Gems are companies that Wall Street has identified has having monstrous potential. But that potential might not manifest for several years.

People ask me on Twitter about certain stocks and what I’m looking for before I decide if a stock is being manipulated or not. Sometimes it’s obvious, other times it’s unclear.

What we’re looking for is indicators. Indicators that a stock is being manipulated. Here is a list of ten I wrote about previously.

Some are more obvious than others. Your job is to build a case, just like a lawyer trying to put away a felon. You need as much evidence as possible. An overwhelming number of indicators so that you can be confident in holding when times are tough.

One of the best is indicators is the one we’ll be talking about today. Large, unexplained stock drops.

If you’ve been investing in any SPACs recently, then you’re probably quite familiar with these drops.

(Warning: Some drops are warranted. It might be hard to establish a reason for the drop, but it could be out there. You must do the research, or you could get burned.)

For example, if you’re invested in electric vehicle stocks and your stock drops 5%, but the company hasn’t released any bad news, then you need to look around. What are the other companies doing? What’s the sector doing? What is the competition doing?

Electric vehicles compete with gas-powered vehicles for market share. If gas-powered cars were to drop in price by 50%, and the price of gasoline was to drop by 80%, this could be a reason your EV stock dropped 5%.

What I’m saying is when you see your stock drop 5% for seemingly no reason, instead of saying, “Oh shit I’m screwed,” you need to say, “Okay, time to do some research.”

When a stock is red you can either spend your time doing research or reading nasty comments on stock message boards. The latter is pointless and will depress you further. It’s also potentially harmful because it can be tough to tell who is a real person, who is a bot, who is a short-seller, or who is a paid manipulator.

Research is a better way to spend your time when a stock is red.

Research will calm you down.

They say that day-trading is one of the most mentally exhausting professions out there. It’s a constant stream of ups and downs. Euphoria, panic. Happy, sad. Thrilled, angry.

While you might not be day-trading, if you’re watching your stock’s movement all day, you’re still subjecting yourself to the same things a day-trader is. This is not productive and raises your anxiety.

Wall Street wants your gems. They want them because there is a finite number of gems available. If you own the gem, Wall Street cannot own it. When manipulating stocks, their goal is to mentally exhaust and depress you. If they crush your soul, or push you into a margin call, they can steal your stocks.

Which, as a side note, is a good reason not to buy manipulated stocks on margin. If a stock is being manipulated, they might crush it by 80% and leave it there for months or years.

Check out the five-year chart of GasLog. Wall Street obliterated this thing, and then BlackRock took it private for cheap. By purchasing manipulated stocks, you are competing against some of the most powerful thieves on the planet.

Wall Street has trillions of dollars and some of the smartest employees in the world. They are the Lex Luthors of the investing world and there is no Superman.

But they cannot force you to sell. All they have is Inception. They’re trying to plant ideas in your head. “This is a bad stock. I should sell. There are better opportunities elsewhere.”

They do this by hammering the price. Posting terrible comments. Short reports. Downgrades. They’ll throw everything they can at you. But they cannot force you to sell.

That is a decision only you can make.

Okay, so let’s talk about the 5% drop and why this number is important.

If your stock is being manipulated, then you might be used to seeing it constantly in the red. Red pre-market, red during the day, and red after hours. This is normal for a manipulated stock. They do this on purpose because they know you’re always watching it. The more red you see, the more likely you are to get depressed and sell.

Even just the color red has been found to be annoying and stress-inducing. Red is the color of stop signs. It’s the color of traffic lights that stop you from moving forward. Red is fire. It’s blood. It’s the color someone’s face goes when they’re furious. Red sucks. And Wall Street knows this.

When Wall Street really goes after a stock, they can crush it big-time. 5%, 10%. Whatever they want.

Your job is to interpret the reason behind this drop.

Investing in individual stocks for long-term purposes is all about having a thesis. A well-thought-out plan of attack. You need a list of reasons why this stock is great, why its better than its competition, and why the company will keep growing.

The more evidence you have that the company is great, the easier it is to stay calm during the Red Storm. While everyone else is panicking, just picture yourself sitting cross-legged on the floor in a Zen-like state. Meanwhile, a hurricane of blood is whirling around your house.

“Runnnnnnnnn!” your roommate yells. “We have to escape.”

But you just keep sitting there. Saying nothing. You know it’s an illusion. Despite all the horrifying sounds, the Red Storm can’t hurt you. The walls groan, the ceiling flexes. Torrential rain batters at your windows. Pools of blood seeping under the front door.

“We’re all going to die!” your roommate says. “It’s the end of the world.”

But still, you remain calm.

Hours later, the storm dissipates, and then vanishes entirely. It’s bright and sunny out again. You stand up and dust yourself off. Looking around, you see your roommate is dead. They panicked so much they ran into a wall, hit their head, and died of self-induced blunt force trauma.

They sold the stock.

You held the stock. And in the end, you won.

Because you trusted your thesis and you knew the 5% drop was nothing more than manipulation.

The more a stock drops in the absence of bad news, the more likely it is to be manipulation. One way to approach this is to look at the market cap of the stock and figure out how much the drop has affected it.

For example, if your company has a market cap of 500 million, then a 5% drop represents a haircut of 25 million to its market cap.

A company’s market cap is a reflection of its current financial state + future potential.

So why is this company worth 25 million dollars less today than it was yesterday? You need to look around. Do some digging instead of watching your stock bleed. If you find nothing, and nobody else can find anything, then your stock is being manipulated.

Stocks do not drop in a vacuum.

Stocks go up in a vacuum.

This is because every day people go to work. Companies build things (or provide services) and then try to trade them for other things, usually currency. This creates wealth. Wealth causes stock prices to go up because wealthier companies are more valuable.

If your company is making a profit this becomes even easier. Just look at the quarterly profit per share. Say it’s $1.5. This means that every 90 days the company’s stock price is $1.5 more valuable.

If you divide this by 90, you get $0.0167

Every day of the quarter, in the absence of news or anything else that might affect the stock price, the stock should tick upwards at least $0.0167 per day, and more on Mondays to account for weekends/holidays.

So, if your stock should be creeping up 0.01% a day, but it dropped 5%, and you can’t find a reason why other than people saying the CEO is stupid, your stock is probably being manipulated.

Although it’s possible you missed something. Sometimes a stock does deserve to drop 5% in the absence of a negative press release put out by the company.

But the reason for this is usually easy to track down.

Just imagine your small company was a giant like Facebook or Apple. If Facebook dropped 5% you’d say, “What the heck?”

“Did they get hacked? Did a major country ban Facebook? Is everyone switching back to MySpace?”

If Facebook dropped 5%, people would figure out why. There probably be a Reuters article out before the market opened. “Facebook Shares Drop after CEO Found to be Cloning Dinosaurs and Setting Them Loose in Central Park.”

The bigger and more popular the company is, the more people will be invested in it. They will want to know why it dropped. Popular companies have a bigger support network of investigators.

But if you’re investing in a tiny growth company that might not see a profit for another five years, this support network is smaller. It might be just you and InvestingMomma97. Make friends with the other bulls on your stock message boards. Join a Discord, a subreddit, or a Facebook group. Just be careful it doesn’t just turn into an echo chamber. “This stock is great because this stock is great!” is not a good reason to stay invested.

“This stock is great because it’s growing, has monster potential, and is on the verge of a major breakthrough,” is a good reason to stay invested.

The drop might be larger than 5% or it might be smaller. Big companies don’t usually drop more than 1-2% for no reason. But SPACs can easily drop 8-10% for no reason. Those are the days you need your thesis handy.

When investing in individual stocks I find it handy to keep a notepad file for each stock. In this file you should write/paste in all the reasons you’ve invested in it.

If your stock drops 5% then just open the file. This will calm you down. You’ll remember all the reasons you invested in this company in the first place.

Once you’re calm you can start doing research into the drop. If you can’t find anything, or you find something but it doesn’t warrant such a large haircut to the stock price, then this might be a good time to average down.

Averaging down can be hard to time with manipulated stocks. Since manipulated stocks are so volatile, I make it a rule to only average down once every few weeks. Once a month might be even better.

If you look at some of the popular electric vehicle SPACs, you’ll see that some of them have dropped 60-80% from their highs. If you had averaged down too soon, you would have been massacred. (Especially if you averaged down on margin.)

There are three reactions to watching a gem drop 60%, one is to panic and sell. One is to hold. The most profitable reaction is to buy more. You just need to make absolutely sure that your stock is a gem. Since gems are great companies, they will always recover.

Imagine a tennis ball in the palm of your hand. You’re holding it four feet in the air. It represents your stock. This is where you bought. Picture yourself throwing the ball as hard as you can at the concrete floor. As it hits the surface you take a mental snapshot. Yes, it’s lower to the ground. It’s at rock bottom. But nothing has fundamentally changed about the tennis ball. All that’s changed are its coordinates. It’s still a good ball. Because then it bounces. And since you threw it hard, it bounces higher than the initial four feet. It reaches a peak near the ceiling and you take another snapshot. This is where you sell.

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