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Why Are Shipping Stocks Going Berserk?

The volatility in shipping stocks of late is a lesson in why you should avoid trying to make a quick buck in a rally that seems too good to be true.

Entering November, DryShips (DRYS) traded in the mid-4s and hadn’t had a major up-move since April. Two weeks later, on November 15, the stock closed at 73. Other shipping stocks have posted similar November returns. Take a look:

  • Sino-Global Shipping America (SINO) +574%
  • Diana Containerships (DCIX) +353%
  • Globus Maritime Limited (GLBS) +295%
  • Seanergy Maritime Holdings (SHIP) +122%
  • Euroseas (ESEA) +96%

You get the point. Basically, shipping stocks have gone bonkers this month. The question is why.

Well, let me try and answer that in two charts of the same shipping stock. Let’s use DRYS as an example. Here’s a chart of what DRYS had done in November entering Thursday trading:

DRYS-1

That’s quite a chart—especially when you consider the stock didn’t really get going until about a week ago!

Now let’s look at a year-to-date chart of DRYS to get a broader picture of what’s going on with the stock.

DRYS-2

Yikes.

Even after its monster spike this month, the stock has still lost 71% of its value since January. And that’s nothing. Two years ago, DRYS peaked at 7,020 per share!

DRYS is an extreme example, but the other shipping stocks have had big drop-offs too. After peaking in the high 6s in August, Top Ships (TOPS) had fallen all the way to the low 2s by early November. ESEA had tumbled from 2.8 to 1.2. SINO had slipped from 2.2 to less than 1.0. Etc.

Basically, shipping stocks had been knocked on their collective butts for about three months, and then investors overcorrected to the upside starting about 10 days ago. The bearish sentiment toward shipping stocks was sparked by Hanjin Shipping Co., the largest container shipper in South Korea, declaring bankruptcy in May. Donald Trump’s anti-free trade positions seemed to accelerate the losses starting in August.

So investors swooped in, short selling any shipping company stock; short interest in DCIX quadrupled, more than doubled in GLBS, etc. Eventually, shipping stocks plummeted so fast and so far that those same investors bought them back at bargain-basement prices—commonly known as “short squeezing”—and the stocks rose much faster than they fell. In fact, trading in DRYS was halted on Wednesday while the Nasdaq looked into the insanity of such a run-up in a company with no earnings and a 97% sales decline in its latest quarter.

Guess what happened when trading re-opened on Thursday? The stock came sky-diving back to earth, down 70% in its first two hours of trading. Other shipping stocks plummeted too on Thursday: GLBS was down 43% in morning trading, SHIP tumbled 35%, ESEA crashed 34%, DCIX plunged 22%. Only SINO (+13%) survived the morning cull.

The reason I’m pointing out the insane volatility in shipping stocks over the last few weeks is two-fold.

First, steer clear of shipping stocks—any shipping stock—like an ice cap in the middle of the Atlantic.

Second, when you see a rally that aggressive in a certain grouping of stocks, chances are it’s too good to be true. Those types of short-squeeze-fueled run-ups have a very short shelf life. They’re little more than a mirage, and you could seriously lose your shirt if you try to chase it for a quick return.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .