Google The Latest Casualty Of Hedge Funds Moronic Behaviour

The irrational investors always make the same mistakes again and again because they act on their emotions. The funny thing is, many hedge funds behave exactly the same way, for a completely different set of reasons. Past two weeks, the massive unloading in Google confirms how unreasonable both average investors and hedge funds can be.

What Happened To Google Since Beginning Of March 2014

Following is a simple daily price chart on Google.

Below is the sentiment among the Stocktwits members over the past month.

Notice how the sentiment among the average joe traders surged in late March to early April while distribution was is progress.

Price pattern anyone? Classic bear flag right there. Bear flag and bull flag are continuation pattern. They are basic patterns any properly trained chart readers would not miss.

The outcome, of course, is further selloff.

As in the classic Wall Street speak, these Google fans are married to their positions.

The Cornered Hedge Funds

As reported by various sources, Google is one of the top holdings by the major hedge funds.

(Source: Zerohedge, As The Hedge Fund Slaughter Continues, Here Is Who Is Unwinding And What Stocks To Watch)

Notice that it was also one of the few names at the top of the list where these hedge funds are showing a profit.

If you were running a hedge fund, would you make the objective decision to cut losses on your biggest positions even though that could be the correct decisions to make?

Of course not. Cutting losses on size like this will destroy the performance of the funds and in turn trigger redemption from investors. The logical decision is to ignore the risk and pile on more money on the losing positions to hope for the best.

The funds are cornered to make bad decisions because the slim chance to turn around the situation is better than taking the route of sure destruction.

These hedge funds are not married to their losing position by emotion. They are married to them by logical, although not necessary ethical decisions.

Sell The Winners To Free Up Cash

In order to sit on the losers, the hedge funds have to find cash somewhere.

They do exactly what the irrational investors usual do by selling the winning positions to get more cash to maintain their margin requirements. If there are extra cash freed up from the winning positions, they average down on their losing positions and hope for the best.

That’s why the top holdings of the major hedge funds that are still profitable are being hammered. Once one of these funds started to unload, the rest of the hedge funds have no choice but to unload too because they need to book a profit on their positions. They do not have a choice.

This is exactly why the bear flag was showing on the Google daily chart in late March to early April.

A Repeat of What Happened to Apple

I warned back in end of January about the situation of Google is very similar to that faced by Apple.

I received quite a number of hate messages since. It was obvious to me that many people are investing in Google irrationally and emotionally. It is, by itself, a big warning sign.

Stock trading, especially trading the big names, is no longer a single dimension thing. One cannot look at a single metric like fundamental data and assume the world will behave according to your beliefs. What happened to Apple and Google is a wake up call to all investors.

Money flow matters. What the biggest players are doing to the stocks matters.

Share