Morning Comment: They're running out of stocks to short.


Uneventful days have been few and far between over the last several months in the stock market (and for the last year for that matter), but we’ve had several of them recently. Yesterday was another one of those days...as the broad indices saw very little movement by the close. We do need to point out, however, that it was positive that the market was able to bounce off of its midday lows (when the S&P 500 was down more than 20 points). The Fed “minutes” indicated that they’re not going to taper their QE program soon and investors took solace in those comments.

One of the big events today will be when several people will be in front of Congress to discuss GameStop Phenomenon...and how this stock (and several others) rallied in parabolic ways over a very small number of days...only to crash back to earth very quickly. Of course, we all know that these wild moves were largely due to a powerful “short squeeze” in certain stocks that had very high levels of short interest. This allowed some investors to push these heavily shorted stocks strongly higher...but those strong rallies were then followed by crashes in those individual names once the much of those short positions had been covered.

This trend of trying to squeeze stocks with high levels of “short interest” did not end with GME, AMC, and KOSS a few weeks ago. This “strategy” was then employed against many of the cannabis stocks...which led to similar moves in names like TLRY, SNDL, etc. The question now is whether this phenomenon can continue or not.

It obviously cannot go on forever. At some point, they will run out of stocks that have a lot of short interest...and so there will be nobody left to “squeeze.” Eventually, these traders will try to squeeze some stock that doesn’t have enough short interest to be pushed significantly higher. Therefore, the stock will roll-back over long before it sees a significant rally...and we’ll know that the gig is up. (This is similar to what happened when they tried to squeeze the silver market. In that case, the market was just too big...but the same kind of “failed squeeze” will take place in the stock market eventually...but it will be due to the size of the short positions being too small this time.)

Luckily, we have something we can use to measure when this phenomenon has come to an end (or at least is coming to an end). Look at the attached chart. It measures an equally weighted basket of the 50 highest short interest stocks in the Russell 3000 Index. (Its symbol on Bloomberg is GSCBMSAL).....Remember, unlike the silver market, the small cap stocks that make up the Russell 2000 & Russell 3000 are easier to “squeeze”...because the market is for those names is relatively limited and illiquid...so you won’t be surprised to see its huge YTD moves on the chart below.

This index rallied a whopping 58% on an intraday basis over the first 18 trading days this year!!! That compares to a rally of just 3.8% in the S&P 500 and an 11% rally in the Russell 2000 over the same time frame!!! This gives a whole new meaning to the term, “outperformance.” This incredible rally took the reading on its RSI chart to above 91 in January! That is the most overbought reading this index had ever seen since its creation in 2008 (by far).

However, as you might have guessed, this index of these “most shorted” stocks in the Russell 3000 has underperformed over the past 2-3 weeks. It made a “lower-high” last week...SO if it follows that with a “lower-low” (below 308.68), it’s going to raise a very compelling red warning flag for these highly shorted names. Therefore professional traders...AND ESPECIALLY THE NON-PROs...should be watching this index VERY closely going forward. If/when it makes a “lower-low”...and confirms that the reversal in the profitability in squeezing these highly shorted names has taken place...the index will likely fall in an even more substantial way than it already has so far. In other words, it will tell us that there are not many/any stocks left to “squeeze”. (We already have a situation where the short interest in the broad market is very near all-time lows, so the odds are quiet good that making nice profits by “squeezing shorts” will not last very much longer.)

Sure, there will be plenty more ideas and strategies that will continue to help traders make some very nice gains over the short-term in the future. We’d also say that short squeezes have been taking place for hundreds of years, so it’s not like they’ll disappear forever. However, it’s going to be tough to make money by using this strategy over the near-term in the stock market...for the simple reason that there are not many stocks left with high levels of short-interest. This particular strategy...which has worked VERY well for SOME investors this year...is running on fumes. Caveat emptor!

(If you'd like to get these unique insights during these fascinating times in the investment world, please click here to subscribe to “The Maley Report.”)




Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.





Posted to The Maley Report on Feb 18, 2021 — 12:02 PM
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