Having a sound understanding of the stock market can often feel out of reach. Sometimes the market follows a predictable pattern and appears to make sense, while other times it is volatile for no clear reason.
More often than not, stock prices are affected by a number of events and factors, some of which weigh on stock prices indirectly and others that do so directly. These factors can cause minor market volatility or a major stock market crash.
We’re going to look at a few of those factors below and focus on one that you’re probably not aware of… tape bombs.
Tape Bomb Meaning
The term “tape bomb” presumably traces its origin to the 19th and early 20th centuries, when ticker tapes were used to relay to stock traders around the world the stock symbol and the latest volume and price on shares as they are traded.
A tape bomb is basically an unexpected bad news event that has been pretty prevalent lately and has or will move financial markets.
These events occur unexpectedly and as a result, traders may be caught off guard. Traders often react by exiting the market or adjusting their trades, causing a significant trend reversal or swing. Sometimes, tape bombs can occur in the form of a black swan event.
A black swan is an extremely rare and difficult-to-predict event that has a huge impact on the market.
Examples of black swan events include the terrorist attacks of 9/11, the 2008 global financial crisis, and the Covid-19 pandemic of 2020. Such events can be difficult to navigate since it is not easy to distinguish short-term fear from the long-term correction that often follows.
What causes tape bombs?
Tape bombs come in all shapes and sizes and vary significantly in their actual effect on stocks. Let’s take a look at a few things that can trigger a tape bomb in the stock market.
Bad earnings surprise
The earnings season is one of the most common instigators of tape bombs. Every three months, publicly traded companies are required to file their financial results with the U.S. Securities and Exchange Commission (SEC).
Traders usually watch with close attention as each earnings season kicks off to avoid missing out on any trading opportunity.
If a major company reports better-than-expected results, the stock tends to go up and can also push other stocks higher.
On the other hand, if a company posts a surprisingly poor earnings report, its stock could slump and also bring other stocks down with it. Changes in a company’s guidance following the earnings report can also affect the stock price.
For example, shares of Walmart and other major retailers were recently hit hard after the company reported worse-than-expected earnings for its fiscal first quarter. The company blamed the disappointing earnings on rising operating costs.
Walmart shares lost 19.5% in the week ended May 20, a massive slump for a stock that is often less volatile than the broader market. The earnings report also sparked a sell-off of other U.S. retailers and consumer-oriented stocks such as Target (TGT), Costco (COST), and Dollar General (DLTR).
International events can also have a dramatic effect on stock prices. News of war, terrorism, boycotts, embargoes, or tariffs might significantly weigh on stock prices.
For example, the Dow Jones Industrial Average lost 684 points in the wake of the Sept. 11, 2001 terror attacks.
Another good example is when former President Donald Trump launched a major trade war with China in 2018 by imposing tariffs on imports of Chinese steel and aluminum.
Trump initiated the trade war to pressure China to make major changes to aspects of its economic system that promote unfair trade practices, including subsidies to state-owned enterprises, forced technology transfer, intellectual property theft, and limited market access.
Unfortunately, the effects of the trade war went beyond economics.
According to research by economists from Columbia University and the Federal Reserve Bank of New York, Wall Street companies lost at least $1.7 trillion in the value of their stocks because of increased tariffs on Chinese imports to the U.S.
Unexpected FDA rejections
Pharmaceutical and biotechnology stocks fall under a category of companies that are heavily regulated by government agencies, particularly the Food and Drug Administration.
FDA announcements to approve, reject, or halt the development of products made by these companies are usually high-profile events that can affect the price of a stock.
Traders love healthcare and biotech stocks because of their huge price moves, which often happens when a company makes progress or faces problems with its development products like devices and drugs.
Results from a stage 1,2, and 3 clinical trial, and FDA approval can send healthcare and biotech stocks soaring. FDA approval is an important event that tends to excite the market immediately.
On the other hand, if the FDA unexpectedly rejects or halts the development of a drug, shares of that company can fall sharply.
The mission of the U.S. Securities and Exchange Commission (SEC) is to promote investor protection, capital formation, and competition. This regulator has broad investigative powers that make it a powerful adversary for any company under investigation.
If a company comes under the scrutiny of the SEC, this can cause fear and panic among shareholders and the management.
According to a study conducted by the U.S. Chamber of Commerce, an SEC investigation usually imposes $4.6 million in average direct costs.
Even when the regulator determines no wrongdoing, a company can suffer huge financial costs, with some probes running well over $100 million.
In recent months, the SEC has been cracking down on companies that listed their stocks via SPAC deals instead of using the traditional IPO route.
Shares of Lucid Group (LCID), Canoo (GOEV), Lordstown Motors (RIDE), Electric Last Mile Solutions (ELMS), and Digital World Acquisition Corp (DWAC) have all come under pressure amid a string of SEC probes.
As we’ve discussed, tape bombs are events that happen out of the blue such as the threat of debt default by an indebted nation, a sudden geopolitical flare-up, or a terrorist attack.
Regardless of your trading strategy, learning to trade such events is an important skill needed to succeed. One should be able to evaluate the impact of tape bombs on stocks.
Keeping hard stops is a good way to prevent unnecessary losses in the rare event a tape bomb hits the stock you are in.