When market sentiment is at the extremes (when either fear or greed takes over) it often pays to bet against the prevailing wisdom. Typical indicators for market sentiment often include the number of stocks hitting 52 week highs or lows, advancing and declining volume, activity in the options market (the number of investors buying insurance against stocks falling, or betting on stocks rising) or even the demand for safe haven assets, such as gold.
Today, we may only need to look at Hertz Rental Car.
Hertz just filed for bankruptcy. That means the company doesn’t have enough cash on hand to pay its debts. But investors can’t get enough of its stock. Why?
If the company is in bankruptcy, its stock typically is worthless. However, speculation and day trading in its shares pushed its stock price from near zero all the way to $5. The chart below shows Hertz stock price in red versus Hertz stock ownership in Robinhood, a popular app used by day traders.
As a result of this demand, Hertz decided to do something unprecedented: sell $1 billion in shares directly to the market during a bankruptcy.
In its SEC filing, Hertz said it believes the shares “could ultimately be worthless.” Have you ever heard such a ringing endorsement from a company? By buying the stock now, investors are basically just giving their money away.
Why would anyone do this? Because these investors aren’t concerned with what Hertz stock is actually worth. They just believe that a greater fool exists who will pay them more for the shares than they paid themselves.
Fortunately, the SEC stepped in to halt the sale at the last minute.
This sort of market environment isn’t normal and investors should take note. When others are greedy, it pays to be careful.