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Facebook: From "Skyrocket" to "Air Pocket"

Why did investors suddenly shift their focus from the social media giant's strengths to its flaws?

by Bob Stokes
Updated: August 16, 2018

The same psychology that governs the broad stock market also governs widely traded stocks like Facebook.

For example, when investors in the main indexes are bullish, they tend to minimize bad news. The same thing had been happening with Facebook for quite some time.

For instance, in April 2017, Facebook's stock continued to rally despite the company's admission that it was used by "malicious actors" during the U.S. presidential election.

Animal spirits prevailed as the stock kept marching higher.

Then, earlier this year, Facebook faced the data privacy scandal and Congressional hearings. Even so, the price of Facebook's shares climbed even higher. Here are headlines from around that time:

  • Analyst reveals why he's still bullish on Facebook (CNBC, March 29)
  • Why Investors Remain Bullish On Facebook In Day Two Of Zuckerberg's Congressional Hearings (Forbes, April 11)

In other words, market observers once again found reasons to ignore negative developments.

But, our monthly publication, the Elliott Wave Financial Forecast saw trouble ahead. The April issue made this prediction:

Social media, once seen strictly as a bull market instrument of inclusion, transparency and sharing, will open the door to still-unfathomed avenues of exclusion, obfuscation and assault.

Even so, Facebook's upward climb had a little more to go. As recently as July 24, the technology-news website Recode declared:

... the social media giant looks invincible.

But, just two days later, the prediction made by the April Elliott Wave Financial Forecast started to unfold.

This chart and commentary are from the August Elliott Wave Financial Forecast:

SkyrockettoAirpocket

What happened to Facebook's share price on July 26 demonstrates the potential for a rapid tech/social media reversal. After the market closed that day, the social media leader announced that it missed anticipated Wall Street revenue estimates by 1.5%. The company also announced a slight slowdown in user growth, from 13% a year ago to 11% in the second quarter of 2018: its share price plunged more than 20% in overnight trading. ... In the wake of Facebook's light-switch reversal, analysts labeled its second quarter earnings "disastrous."

Observers went from brushing aside bad news to calling a revenue miss "disastrous."

Only after Facebook's share price plunged did The New York Times say:

Facebook Starts Paying a Price for Scandals

As our August Financial Forecast notes:

Investor euphoria toward technology and the companies that develop it was so powerful that Facebook's flaws were brushed off. But investor euphoria has a limit, which was reached on July 26 when the scales of social mood shifted dramatically.

Social mood drives financial markets, not news or events.

Learn what EWI's analysts anticipate next.


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