What happened

Shares of Youdao (NYSE:DAO), the Chinese online education service, were giving back gains today after a two-day rally that sent the stock up 80% on extremely high volume. That surge seemed to be prompted by reports that schools in China will be closed through at least mid-February as the country attempts to contain the coronavirus outbreak. 

That news caused some to rush into Youdao shares, believing that it would get a boost from schools being closed. After the two-day surge, traders now seem to believe that the stock has been overbought, and it was down 17.9% at 10:57 a.m. EDT.

An Asian boy sits in a classroom in front of a laptop computer.

Image source: Getty Images.

So what

Youdao just had its IPO in October, and the stock has mostly traded flat since its debut at $17. The company provides online courses for pre-K, K-12, and college students, and offers tools like a pocket translator, learning apps, and online resources like dictionaries.

It's not immediately clear what caused the rally other than the news about school closures, but the gains seemed to be mostly driven by day traders and momentum, given that trading volume reached 1.9 million shares compared to a daily average of just 100,000.

Now what

Trading volume remains elevated today at 940,000 shares exchanged, indicating that the volatility in Youdao stock is likely to continue. Notably, other Chinese online education stocks like New Oriental Education and TAL Education Group have seen modest gains in the last few days, but nothing like the explosion that Youdao has experienced. That may be the clearest sign that Youdao's rally is just a bubble.

Investors may want to stay away until trading volume cools off and the wild swings go away.