Twitter (TWTR) closed sharply lower Friday, falling $9.54 or 13% on almost 58 million shares. The slide comes after an extraordinary rally that saw Twitter shares rise more than 150% from the original offering price of $26 at the IPO less than two months ago.
This morning before the market open, Macquarie Research downgraded Twitter shares to underperform, stating they had gone “too far, too fast.’” This may have been the initial catalyst for the selloff.
Still, the action during the day looked like momentum investors clamoring to get out of a stock with a very large market cap relative to the small float (or number of shares available to trade).
When there are fewer shares to trade, it can create huge demand for the stock on the way, especially when there are many market participants trying to short sell what they believe to be an overvalued asset.
Unfortunately, the same thing can happen in reverse and a price decline can also be intensified.
The question now is whether this action was the beginning of a larger herd heading for the exits or just a brief purge before the resumption of what has been a quick but powerful trend.
Likely, Twitter will need some time to work off the damage that was done Friday and may decline further over the coming weeks before resuming a longer-term bullish trajectory.