We were asked why the stock of Virgin Galactic ($SPCE) has crashed by more than 40% despite the positive news and good figures. This is an excellent question because everyone would instinctively expect the opposite and sign the equation "Positive news = rising stock price". In this blog post, we show you why this does not necessarily have to be the case and what large institutions like Goldman Sachs have to do with it.
What happened?
On Sunday, July 11, 2021, British billionaire Richard Branson became the first person to fly into space with his own space travel company. The company is called Virgin Galactic, which aims to make space accessible to tourists. (Tickets currently cost about $250,000).
While this sounds like a successful launch on the one hand, it initially has little to do with the stock market. Especially with such major events that are picked up by the media, thousands of people who have never heard of these companies are looking to invest in the stock and buy it the next day. This group of people who have little knowledge of the stock market and try to make quick money based on news is referred to as "Dumb Money".
This thesis is confirmed when we look at the pre-market chart, which starts at 4 a.m. New York time, i.e. 10 a.m. with us. We see that we have a gap up. This, in turn, causes everyone who has already prepared to buy at the market opening to be afraid of missing out on this supposedly good trade.
Dumb Money vs. Goldman Sachs & Co.
So while people who have no idea what the stock market is all about ("Dumb Money") are buying, the company takes the opportunity to carry out a capital increase (in English: "offering").
What's behind it? In general, companies often need money when they develop new business ideas or tap into new business areas. This is nothing unusual. But especially with Virgin Galactic, it's not about bringing a new consumer good to the market, but about traveling to space. Therefore, a lot of capital is needed here. Currently, this is $16 million per month, as the filings (a formal, standardized document that U.S. publicly traded companies have been required to submit since 1934) show.
Was the capital increase foreseeable?
The important question: Was the capital increase foreseeable? YES and it is not particularly difficult to find this information. Companies have to register this in advance and need permission from the stock exchange regulator. In this case, the registration is valid for three years. Later, there is another document that shows the details and announcement of the capital increase. On June 17, 2021, there was a registration for potentially $1 billion, and at the market opening, the offering worth $500 million was announced.
How do Goldman Sachs & Co. trade against you?
In this case, Credit Suisse, Morgan Stanley, and Goldman Sachs were commissioned to sell exactly these shares worth $500 million. These are new shares that the agents receive to sell on the open market.
Imagine opening your brokerage account and suddenly having $500 million worth of shares recorded there. Your task now is to sell these shares on the free market. These banks also have no risk because they are just executing an order. They usually get paid 2-3% for this, which is a lot of money at this amount. The timing is perfect because they use the media attention to have someone on the other side of the trade. Everything is perfectly prepared and staged so that they have the necessary volume and find people who buy and buy, while they sell about 11 million shares.
3 tips to help you recognize these traps
What tips can we derive from this so that you no longer belong to the group of "Dumb Money" in the future and even act on the same side as the institutions?
- Events that are known well in advance and already priced in are often used for these purposes. They are therefore also called "sell the news events". This does not mean that capital increases are always carried out. Nevertheless, the increased volume is often used to sell large positions and take profits.
- Pay attention to the chart: only buy when the chart is strong and breaks out of daily structures. In this case, we went directly below the previous day's low in the regular trading session, which is never a valid signal to buy.
- Check if you have a clear plan of where you want to enter and exit at a loss. If you don't know how likely your trade is, you have no niche and are currently only following your emotions, which is never a good trade.