This article also published on TheStreet.com
Every bull market cycle has them, a few stocks that defy gravity and smash expectations. Frustrating both bears who consistently make attempts at shooting down these high-flyers and overanxious bulls, who find themselves pulling the sell trigger prematurely. NFLX is the most recent company to take home the title of most frustrating stock for both bulls and bears.
There is a complicated market dynamic at work in NFLX at present. It is a dynamic that involves a lack of faith from both bulls and bears. This lack of faith or disbelief in the virtues of the company, causes bulls to offer stock after gaps similar to the earnings explosion we had this past Thursday. And it causes the bears to offer stock at the very same time, as they feel it is an ideal opportunity to get short or add to short positions.
Chronic disbelief syndrome, or CDS for the purposes of this article, causes the bid and offer equation to remain consistently unbalanced, thus driving the stock higher. CDS often times makes a mockery of tried and true technical patterns, indicators and the seasoned traders who have come to rely on these tools.
CDS essentially gives life to the bulls by creating an underlying bid in the stock as a result of a consistent state of anxiety amongst a majority of the shareholders regardless of their opinion – bearish or bullish – on the stock. When a consistent state of anxiety becomes the psychological backdrop behind a momentum driven move in a stock it causes bears who initiate a short position to cover their positions, as both technical and fundamental reasoning become obscured. It also causes bulls, who are fearful that their profits will evaporate, to constantly have to buy back into the stock, chasing it higher as they come to realize that they have taken profits prematurely.
This cycle, often times, continues for much longer than any market participant would expect. What is most elegant about this type of momentum driven move, fueled by anxiety, is that it becomes a sort of self-fulfilling prophecy or reflexive relationship between the stock price and fundamental outcome of the company whose price is being driven through the roof. The fundamental outcome for the company often times ends up being greater than any market participants would expect as a direct result of the stock price fueling management, employees and partners desire to innovate, succeed and structure the company in such a way to maximize the perceptions that currently exist regarding the company.
Therefore, the company ends up being influenced by the stock price, as opposed to what most people consider to be standard value creation, where management goes on making these intellectual decisions that create industry, jobs and so on. Human beings, as a whole, give the greatest effort when either faced with the threat of immense pain or immense pleasure. In today’s society, immense pleasure – thankfully – has gained the edge as a motivational factor toward achievement.
A consistent, anxiety driven move in a company’s stock price serves as a motivational factor for everyone involved with the company. CDS, in the end, becomes the innovator, motivator and profit machine that people ultimately end up giving credit to company management for. All this as a result of a few anxious bulls and bears, trying to renovate their kitchen, buy a new car and/or send their kids to college. The butterfly effect at its best.
NFLX is knee deep in CDS at present. Where the anxiety bubble pops and how far an impact it will have on the actual outcome of NFLX fundamentally, nobody knows. I’m fine with taking a sideline seat to this event, as I am not immune from the anxiety that is an affliction amongst traders in this stock. However, it’s fun to watch what a simple idea to deliver movies more efficiently can do to an entire population of traders.