Trading Psychology Just Turned Against Square Inc Stock

SQ stock - Trading Psychology Just Turned Against Square Inc Stock

Source: Chris Harrison via Flickr (Modified)

I’ve warned that Square Inc (NYSE:SQ) was a “right stock, wrong time” kind of investment several times over the course of the past several months  That is, though I like what the company is and where it’s going in its war with services like Paypal Holdings Inc (NASDAQ:PYPL), SQ stock was and still is too overbought to step into just yet.

A correction was a necessary evil, and an inevitable one. Square stock was up as much as 100% for the past six months…. as of a week ago.

Now, SQ has fallen 19% in 7 days and is still falling — for no real reason.

Clearly something must be different.  Is this the long overdue correction or is that still around the corner?

SQ Stock Is Still Speculative

In a perfect world, the price of SQ stock would always reflect the market’s best risk-adjusted guess of Square’s trailing results and its plausible prospects. We don’t live or trade in a perfect world though.

The reality is that the relatively new Square stock — which IPO’d in late 2015 but only became a sensation in the middle of last year — is still more of a speculation instrument than an investment. The game right now? Figuring out how other traders will feel about Square sometime between six days and six months from now.

Funny thing about the psychology of speculation though. It tends to recycle itself from one stock to the next, and can be fairly predictable in terms of outcomes.

Generally speaking, analyst upgrades drive stocks higher. Upgrades also prod other upgrades (analysts like to migrate to the most populated island), which can further fan bullish flames, which in turn can incite more upgrades, which can… well, you get the idea.

What happens, however, when upgrades and raised price targets no longer provide a boost for a stock? That’s where SQ stock looks like it is as of this week.

War of Words

Mizuho got the ball rolling on Friday when analyst Thomas McCrohan upped his price target on SQ stock from $50 to $61. Deutsche Bank analyst Bryan Keane followed suit, upping his price target to $57, also citing new features and benefits for users of its payment platform. Shortly after that, Evercore raised its price target from $51 to $67, touting Square’s new features that spur more frequent activity.

But not only have traders not responded to the raised price targets, they’ve willfully ignored them, dragging shares in the opposite direction.

Interestingly, at the same time several analysts are upping their bullish ante on Square, a few have also expressed doubts about any further upside.

Craig Hallum’s Brad Berning was one of them, downgrading SQ stock to an outright “Sell,” pointing out that:

“Competition is tired of Square winning and they are bringing scale, lower pricing, and functionality.”

Berning was talking about First Data Corp (NYSE:FDC) and Veritone Inc (NASDAQ:VERI), though it’s likely other players in the business are plotting to slow Square down as well.

So are the bearish analysts the sole reason for the selloff in the meantime? Not likely.

SQ stock actually moved higher the trading day after Hallum’s thesis was posted. The bigger selloff didn’t resume until a couple of days after Berning said his piece, suggesting this oversized slide isn’t merely reactionary. In fact, there is no clear catalyst for the stock’s current weakness.

That’s a problem. It suggests this is something traders have been thinking about, and even planning on, for a while. They just needed a reason, and nothing incites selling like… selling.

And the voicing of all of these opposing viewpoints is just another sign that this stock’s underpinnings are in flux.

Bottom Line for SQ Stock

So is SQ stock’s continued decline a guarantee? No, there are no guarantees in trading, and this situation is no exception.

The SQ stock rally, for all its newly-developed risks and even with the current rout, more or less remains intact.

All the same, this wave of mostly-ignored analyst activity is worth noting. Too often, the market ignoring analysts is a subtle clue that goes overlooked. And traders get into trouble that could have been avoided.

The great irony is, the potential short-term pullback now underway will be interpreted by some as an indictment of the company — even though that’s far from how a wave of profit-taking should be seen.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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