One of the most historic short squeezes I’ve ever seen in my 22-year career actually came this cycle.
Short-sellers were running rampant throughout 2022.
The majority of stocks peaked in 2021, and the selling continued throughout the first half of the following year.
But the short-sellers overstayed their welcome.
You see, market breadth started to improve after June 2022, as the major indexes continued to make new lows.
In other words, by October 2022, with the S&P 500 hitting new lows, fewer and fewer stocks were still going down.
Many were already participating in the new bull market.
Here’s the thing: Economists were factoring in a “guaranteed” recession.
And, heading into 2023, the consensus among analysts was that the S&P 500 would actually decline over the coming year.
For the first time this century, Wall Street was predicting the market would fall.
Of course, not only did the market NOT fall.
The S&P 500 went on to post back to back years of 20%-plus returns and the Nasdaq100 nearly doubled in value.
Now, let’s talk about stock selection in this kind of environment.
You see, short-sellers didn’t cover their shorts during the back half of 2022, as the market was already starting to head higher.
They did the opposite. They added to their short positions – and they made themselves even more vulnerable.
One of those names was Carvana (CVNA), a company that sells cars through giant vending machines.
Everyone agreed this was a dumb idea.
And 40% of the float was short CVNA, just as the new bull market was getting going.
When you combine a new bull market with some of the highest short interest in the market, this is what you get.
Over the ensuing 30 months CVNA has gone up 100X.
That’s about a 10,000% return off the lows near the end of 2022.
When people ask me about short squeezes, how do I not bring up this example?
Selling cars through giant vending machines is a dumb idea.
Everybody agrees it’s dumb – massive short interest.
And, of course, everybody’s wrong.
Spot the vulnerability, take advantage of the situation.
There will be more of these.
The ideas will be just as dumb, maybe even dumber.
And the short-sellers will be all over it.
That’s where we come in – to bet that they’re wrong.
That’s where we make money.
Keep an eye out for more of these short squeezes.
[MAILBAG]
This Week in Everybody’s Wrong
On Monday, we talked about how hard it is to measure market sentiment.
A lot of people try to do it – many media companies use their indicators to attract as many eyeballs as possible.
Here’s why your new sentiment indicator is probably useless.
On Tuesday, we took a deeper look at how people feel about the stock market right now.
They’ve rarely been this pessimistic, and short interest is at historic levels.
On Wednesday, we reviewed my friend Barry Ritholtz’s new book, “How Not to Invest.”
Barry’s first book, about the Global Financial Crisis, is a must-read, and this one is too.
Here’s why everything everybody thinks they know about valuation is wrong.
On Thursday, we took a trip to the Great White North to explore one of my favorite places in the world.
It also happens to be a great place to invest right now.
On Friday, we talked about our media diet.
Are you going to wake up Monday morning at 6 am and put down three cheeseburgers and fries with an ice cream sundae?
Here’s what we must do if we care about our money and we would like to see it grow for us.
On Saturday, we went to the movies and we got to know more about your friendly neighborhood short squeeze.
It’s about humans being human, and there’s always an explosive move happening somewhere.
Here’s why we embrace short squeezes.
Have a great Sunday.
I’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs