FinTekNeeks

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Erratic Moves in PIP

Posted in Trading

The following article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may have changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure.

Introduction

There has been an interesting stock that recently played out predictably. I was interested in this stock about a month ago, because of the announcement for a special dividend. The stock has been rising steadily for months. The dividend was paid last Monday, and not surprisingly the stock tanked pre-market similar to the dividend payment amount. What was surprising was the reaction afterwards, fueling speculation and high volume. Again, I point out this stock because, if the market was rational and efficient, the price movements on this stock would not be dramatic.

The Special Dividend

The stock I am reviewing is PharmAthene ($PIP). The initial announcement for the special dividend of $2.91 per share was announced in November 2016. This was three months before the dividend was to be paid out. From my understanding, the dividend is a portion of the payout from a court judgment against SIGA Technologies. The payout was paid in installments, which was fully paid last year. The announcement calls for the dividend to be paid to “stockholders of record on January 24, 2017, with an ex-dividend date of February 6, 2017.”

Although the special dividend announcement occurred in November 2016, the stock has been moving up coincidentally for most of 2016. The stock has been hovering around $1.50 before 2016. I would have expected that at the ex-dividend date, the stock price would drop to that same level. Or it would drop the full $2.91. The price gapped to the latter. I expected to stock to move towards the price range in the $1.50, prior to 2016. I was in the stock in mid January because of the huge dividend payout. Either way, the risk was minimal, since the merger news also did not immediately impact the stock lower.

What I did not expect was the trade volume after dividend payment. I was seeing daily volume of 1 million shares per day. On the February 6, the trading volume was 42 times daily average. The following day, the trading volume is 72 million shares. This is more than the number of outstanding shares of 66 million. The third day 22 million shares traded. I cannot account for all the reasons why the sudden interest, but I can guess some of the reasons with the increased volume.

I belong to a chat room for day traders. There were significant chatter about $PIP on that ex-dividend date. There was a lot confusion as to why the stock price dropped suddenly, but there was significant interest in the price action, volume, and swing trade opportunity. It is definitely self perpetuating, as chat rooms spread the word on the stock, more day traders will take a stab at making money on this stock. I suspect a significant portion of the volume was due to the low stock price and the day traders in various trading chat rooms.

Conclusion

I tend to not trade on any chatter on CNBC or chat rooms. Based on experience (losing trades), it is not wise to deviate from your trading strategy and blindly follow along others. I was in the stock in mid January because of the huge dividend payout. Either way, the risk was minimal, since the merger news also did not immediately impact the stock lower. It is not a recommendation that you trade this stock. However, I believe we can learn some lessons.

  • Volatility can be a curse and an opportunity. Money can be made during volatile times. Money can be lost also in volatile times. Preservation is all about risk management.
  • Markets are irrational.
  • Stocks sometimes behave in predictable ways.
  • When in doubt, get out.
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