When traders miss an opportunity in the stock market, a second chance may never come. Fortunately for Nintendo Co., Ltd (ADR)(OTCMKTS:NTDOY) traders, they have a second chance with NTDOY stock sooner than they expected.
Following the release of the wildly popular Pokemon GO mobile game, NTDOY stock spiked an incredible 110% from July 1 to July 18. I described the Pokemon GO hysteria back on July 14 and told traders to go ahead and take profits on the trade.
While calling the exact top in a stock is nearly impossible, the trade played out just as I had anticipated. After skyrocketing up to an unreasonably high price, NTDOY stock spent the next several days plummeting back down to reality.
By July 28, NTDOY stock was down more than 33% from its peak price. Although it drifted higher in the weeks that followed, it never came anywhere close to its Pokemon GO peak of $38.25.
NTDOY Stock: The Anatomy of a Hysteria Trade
The Pokemon Go-related price action in NTDOY stock was certainly unusual for Nintendo. However, this type of market behavior is fairly typical. Pop culture phenomenons like Pokemon GO come along and lure traders into the market that don’t typically trade.
The first stage of a hysteria trade is that people become aware of the catalyst for the move. In Nintendo’s case, that means that people see everyone roaming around the neighborhood hunting for Pokemon. People start to buy NTDOY stock, and the stock starts to rise.
So far, all of this made sense. Nintendo had a hit new game, and the stock climbed higher. However, the next phase of the trade is what Nobel Prize-winning economist Robert Shiller calls “irrational exuberance.”
During this phase of the trade, the stock’s share price skyrockets way above any reasonable level. This is part of an irrational buying frenzy in the market. Traders that owned the stock prior to the rise are simply along for the ride. In fact, they are looking for the best time to sell. Once it becomes clear that the upward momentum has run out of steam, there is a flood of traders dumping their shares and cashing in on their gains. The stock starts to plummet, and within days or weeks, it has fallen back down to a reasonable valuation.
Lessons for NTDOY Traders
When a phenomenon like Pokemon GO hits the scene, a stock can seem…
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