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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:
- When the stock they are shorting has been decimated and reached their target levels.
- 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.
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