In the American legal system, “hearsay” is generally defined as a statement made out of court that is offered in court as evidence to prove the truth of the matter asserted. This hearsay rule disqualifies most statements made outside a courtroom from being used as evidence in court, if for nothing else than to limit ambiguities, insincerities, faulty perceptions, and erroneous memories as much as possible.
However, there are a slew of exceptions to the hearsay rule where an out of court statement offered as evidence to prove the truth of the matter asserted could be, in fact, admissible. An excited utterance under the stress of a given event happening in real-time is an example of an exception, where a statement made to, say, a 911 operator on the phone would be admissible because the likelihood of a relatively accurate utterance increases.
Another example of an exception to hearsay occurs even when the witness may not even be alive anymore to testify on court. The deathbed or dying declaration exception occurs when, according to the Federal Rules of Evidence,
A statement (is) made by a declarant who, when making the statement, believed death to be imminent, is admissible to show the cause or circumstances of the death. For example, the statement “Horace shot me,” made moments before the declarant died, is admissible for the purpose of proving that Horace committed murder (Fed. R. Evid. 804(2)).
Research in Motion cascaded from $148 per share down to $6 in the period from 2008 through this September. When a stock sees such an endless decline, becoming the butt of every joke imaginable about its vanishing profits and underwhelming product lines, the argument that RIMM was at or near its deathbed is a viable one. Whichever investors wanted to step out of the way, lick their wounds and move on with whatever capital they had left, likely had already done so.
The issue then became whether the company would go out of business, or instead if every bit of bad news was being priced in during an undershoot to the downside. With an easy path to zero, RIMM was on its deathbed. Instead of zooming towards zero, and instead of a dead-cat bounce on light buy volume before subsequently rolling over however, buyers of size presented themselves in a meaningful way in the last week of September to support the stock with, by far, the strongest weekly buy volume RIMM had seen since 2005.
Since then, the stock has more than doubled and, as you can see on the first chart below, buy volume has not only remained strong, but also increased throughout the month of November. This type of buy volume throws a wrench in the idea that RIMM is merely staging a dead-cat bounce before it resumes its march towards the pink sheets.
However, even accepting the dead-cat bounce argument puts shorts in a spot where risk assumed may very well be much greater than anticipated. As an example, consider the second chart below of the weekly timeframe. A standard 38.2% Fibonacci Retracement of the entire downtrend from 2008-September 2012 would still see the stock rocketing to about $60.
Forget about arguments the stock is only rallying based on takeover chatter, whispers about any subpar product launch, or how much market share Apple has stolen from RIMM. With respect to Research in Motion’s stock price action, those are all inadmissible hearsay statements.
When it really came down to it, bulls made a declaration in the face of apparently imminent death of RIMM‘s stock in late-September. They could have easily folded and stepped out of the way of another Lehman Brothers. They could have easily gone on CNBC to plead their case even if they knew their firm was going out of business and were trying to pump it to dump it. Instead, they spoke with their wallets and pocketbooks and bought with size.
And that should be admissible in your courtroom of stock analysis.