What happened
Rocket companies (NYSE: RKT) plummeted 33% on Wednesday after analysts warned the stock had gone too far, too fast.
And
Rocket’s stock price rose more than 70% on Tuesday in what appeared to be another short tightening fueled by Reddit. Just last night, RBC Capital analyst Daniel Perlin cut his rating of Rocket’s shares from top performance to industry performance and reiterated his $ 30 price prediction. That was 28% below where Rocket’s shares closed yesterday .
Rocket Companies’ shares lost a third of their value on Wednesday. Image source: Getty Images.
Perlin argued that the potential risk-reward for investors was “now more balanced, if not tilted to the downside” after the stock’s rapid rise.
Analysts at JP Morgan went even further. “In light of the sharp rise in stock prices, we believe that key investors should make profits,” said JPMorgan strategist Richard Shane on Wednesday morning.
Many traders apparently interpreted the comments of these analysts as a reason to sell their shares today.
What now
Many individual investors are participating in coordinated buying campaigns on Reddit and other social media platforms. This is a dangerous game – one that usually ends in disaster.
These crowdsourced buying frenzy can certainly help to raise the price of a stock sharply – for a while – as we’ve seen with GameStop and now rocket companies. But many of these brokers will overdo a stock to raise its price – and then throw it at unsuspecting investors when they finally move on to their next target.
The worst part? Shareholders who buy later on these rigged highs and do not sell on time can suffer devastating losses.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.