The Most Shorted Stocks Currently In the Market Might Be Ready To Break Out

59 stocks priced above $5 currently have over 30% of their float short. Four of them are setting up for a potential breakout.

A breakout in highly shorted names often leads to a squeeze as short sellers are forced to cover their positions. It is not unusual to see a 20-30%, even 50% one-week move in a highly shorted name, especially when its float is relatively small (under 25 million shares).

Here’s a weekly and a daily perspective of the four stocks.

The Best-Performing IPOs of 2017

Financial Times reports that there were 1700 new IPOs around the globe in 2017 – an increase of 44% compared to 2016. China has been the clear leader with more than 400 listings. In the U.S. companies raised $49 billion or 2X the amount raised in 2016.

Here are some of the notable movers among new listings in 2017:

The crypto-mania has entered the stock market. The stock of any company with a blockchain press release has been hot in the past couple months. LFIN and VERI are two examples.

Coal is back. Believe it or not, coal stocks are gaining attention again. Is it because of Trump’s administration’s relaxed attitude towards coal or is it because the new crypto-mania has boosted energy demand, no one really knows.

The biotech sector was one of the best performers in 2017. Naturally, select biotech IPOS shined. ANAB and ARGX proved once again why price momentum is one of the most powerful equity selection tools.

Quite a few new Chinese companies started trading in the U.S. in 2017. The Chinese education company, BEDU went from $10 to $30 before it had a sizable pullback.

ROKU staged a massive short squeeze. It went from $20 to $60 in two months.

The Canadian maker of goose-feather jackets, GOOS almost doubled in 2017.

Redfin went public and now Zillow is not the only publicly-traded play in real-estate listings.

Let’s not forget to mention the disappointments in 2017: SNAP, APRN, YOGA, HAIR failed to live up to market’s high expectations:

Are ICOs The New IPOs?

The number of publicly traded companies has been halved in the past twenty or so years –  from about 7000 in 1997 to about 3,500 today. The Internet boom brought many small companies to life in the late 90s. So many of them went bust during the dotcom crash in the early 2000s. Regulators stepped in and made it very expensive and difficult for small companies to become public. The decline in small and micro-cap IPOs has been the natural effect of those regulations.

Many companies had to involuntarily remain private longer. The fastest-growing among them have been able to attract a lot of cheap venture capital money and remain private even longer.  Fewer companies filing for an IPO and the best companies going public much later in their growth cycle has meant fewer and smaller opportunities for public investors. The opportunity to make 1000X or 100X in a public company hasn’t really existed in the past 15 years. Even a 10X return has been very rare for a new IPO.

Enter the ICO.

ICO stands for initial coin offering. It is basically an easy way for a company or project to raise money from investors who don’t have to be qualified. The company distributes tokens (coins) that give you access to its future product or service. What’s interesting about these tokens is that they offer an almost immediate liquidity. You don’t have to use them for the actual product or service when (if) it eventually becomes available down the road. You can speculate with them.

A token is not the same a  company share. As I mentioned, it gives you access to a future product or service. It doesn’t give you a partial ownership of a company.

First of all, let me be absolutely blunt about current ICOs. Many of them are scams and it is a matter of time before they go to zero. Many of them have been created by opportunists who intentionally are trying to steal your money. An even bigger number of ICOs has been created by people who have no clue what they are doing and for products and services for which the token model is not a good idea.

The token business model cannot be applied to all businesses. Some businesses are better managed in a centralized manner. Businesses like social media, search engines,  newspapers, digital games, identity, payments, insurance, public transportation (think Uber), etc. can thrive in a decentralized model. What is infinitely more interesting about the token business model is not that they can potentially give you an early access to the next Twitter, Uber or Facebook; it is a model that gets the incentive structure right. Maybe for the first time in human history, the people who actually contribute the most to a service or a product, will get paid the most. You don’t have to be a shrewd speculator to get paid but it won’t hurt.

Happy Holidays and Have An Amazing New Year!

Why and how buying pullbacks in momentum stocks work?

Most market edges come and go and don’t last long. One of the few market edges that have survived the test of time is momentum. The momentum phenomenon has been tested on multiple asset classes in various geographic markets. Hundreds of white papers have been written on it. They all conclude the same thing – it continues to work. I am not going to go into details how and why it works, but here is a quick summary that might spark your interest to further investigate and create your own conclusion:

  • Medium-term momentum works. The best-performing stocks for the past 6-12 months usually outperform as a group in the next 6-12 months. Studies show that most of the momentum phenomena due to industry momentum (similar stocks tend to move in groups) and the 52-week high (it is an important benchmark watched by many).
  • The worst-performing stocks for the past 6-12 months tend to underperform in the next 6-12 months. There’s one exception. Things turn upside-down in the month of January when the worst performers tend to shine.
  • Long-term momentum (3 to 5 years) and short-term momentum (1-4 weeks) tend to lead to mean reversion.

There are two basic ways to trade momentum – buying a breakout or buying in anticipation of another leg higher. Swing traders are more interested in the latter because it provides better risk/reward ideas.

Why and how buying pullbacks in momentum stocks work?

  1. Many algos are programmed to buy near rising moving averages.
  2. It is easier and more lucrative to accumulate a big position on a slight weakness; therefore it is the preferred way for institutions.
  3. People who sold their stocks too early have a hard time buying them at higher prices, so they are a lot more likely to step back on a pullback.
  4. People who have missed a move and are afraid to chase are waiting for a pullback to buy. That pullback might never materialize, but if it does, they will be there to provide liquidity.
  5. The short-sellers who haven’t been squeezed out of their positions are likely to cover on a pullback to a rising 20, 50, 100-day moving average, year-to-date volume-weighted moving average or on the first sign of renewed strength.
  6. All of the above-mentioned is usually enough to
    a) stop a pullback
    b) create a tight-range candle
    c) create a slight bounce.

Such price action within an established uptrend attracts the attention of swing traders, who pile on. Their buying leads to a new leg higher, which often surpasses the previous high.