Momentum Monday – The Short Squeeze That Broke The Market

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The past few weeks have been one giant short squeeze and everything accelerated last week. The size of the squeezes has been unprecedented and they have led to liquidations in other areas of the market. All major market indexes closed the month below their 20-day moving averages for the first time since October of last year and are currently in a pullback mode. 

What is currently quite fascinating is that we are in the midst of a new earnings season and no one is paying attention to earnings reports. All the attention is focused on stocks like GME, AMC, BB, NOK, and other highly shorted assets which are now negatively correlated to the major market indexes. The short squeeze bets have been so one-sided that they have led to liquidity crunch in some brokers. 

There’s another concern on the market’s mind right now. All those new Covid mutations and new restrictions around Europe have inspired a new life in Covid-related stocks. Most vaccine stocks were on fire last week – NVAX, MRNA, BNTX, VXRT. Covid testing stocks also showed notable relative strength after HOLX and ABT crushed market estimates.

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Momentum Monday – Constant Sector Rotations

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Bull markets correct through sector rotation. We see that every week. This is what keeps the market going without having any significant correction. Last week, we saw energy, industrial metals and biotech pulling back while tech mega-cap woke up, Chinese, homebuilders, and highly-shorted stocks sky-rocketed. We see a version of it every single week. Obviously, it is not going to last forever. Bull market rallies end when there’s not a single cloud in the sky but as Peter Lynch likes to say “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than during the corrections themselves”. When we start seeing more breakdowns, we can focus on short setups. At the very least, we want to see first the major indexes (SPY, QQQ, IWM) trading below its previous week’s lows. This hasn’t happened since October.

The WSJ posted an article that a basket of the most shorted stocks is up 25% year to date. There’s a saying that a high flying stock is not going to top until the last short seller is squeezed. This is why we see a big acceleration in highly shorted stocks before they top out. GME is a good example from last week. 

Every share that has ever been shorted will be covered at some point. Covering means buying. When a significant percentage of a stock’s float is short, it has a lot of short squeeze material. Short sellers cover for two main reasons:

  1. When the stock they are shorting has been decimated and reached their target levels.
  2. When they are forced to cover because the price of the stock they are short keep rising.

Momentum money has been going hard after the highly shorted stocks lately. Some names to keep an eye on for the next week: FUBO, SNOW, RKT, CRSR, AI, GOGO, etc.

Try my new subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 50 list of market leaders, and much more. See some of the recent testimonials.

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Here’s a Google spreadsheet tracking all closed option and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email. to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.