Every big move you see in the market is some type of squeeze.
When a stock is up 10%, 20%, or even more in a short period of time – and it happens many times – someone is blowing up.
It’s some hedge fund somewhere who went in too big and is being forced to liquidate their position.
These unwinds happen every single day.
Most of the time it goes unnoticed.
Sometimes they make a movie about it…
Dumb Money
Back in 2021 a group of hedge funds were betting aggressively on the demise of a small video game store company called GameStop (GME).
These short sellers even included some money being managed for Steve Cohen, the owner of the New York Mets.
As the stock price started to rise, these funds started to lose money – because, of course, they were betting on falling prices.
The thing about short selling is that the risk is unlimited.
A stock can only go to zero if you own it. But if you’re short, technically it can rise to infinity and beyond.
That’s why shorts are forced to liquidate their holdings, either on their own or at the direction of their broker’s margin clerk.
GME is a famous example of this phenomenon because there were popular hedge funds involved on the wrong side of a major move.
And you know how much journalists like writing about rich guys losing.
It’s weird, I know, but they love that sort of thing.
In fact, they made a movie about it, “Dumb Money.”
That’s partly because the guy leading the charge from the long side has self-applied the online handle “Roaring Kitty.”
I kid you not.
Check out the movie.
And, of course, there are plenty of articles and Youtube videos about this squeeze.
From Hollywood to Youtube
Short squeezes are not limited to stocks.
We see this sort of thing in options, forex, and commodities too.
In November 2018, a trader named James Cordier lost $150 million of client assets when he got squeezed out of a Natural Gas short position.
Natural Gas rallied 18% in a week, instantly wiping out the assets of almost 300 of his clients, including friends and family.
Cordier infamously published a Youtube video shortly thereafter, apologizing for the losses through his tears.
This video has been sent around to traders all over the world, not for humor, but as a lesson.
Manage risk responsibly, whether you’re long or short… but especially if you’re short.
Your Friends Too
Sometimes we know who’s getting blown up, sometimes we don’t.
In fact, a few times, I’ve actually literally known the guy getting squeezed.
Remember the historic 30% ripper in the Swiss franc (CHF) back in January 2015?
I do.
It wasn’t because Switzerland famously removed the cap on its currency against the euro.
And it wasn’t because they made a movie about it.
I remember it so well because my friend was short CHF.
He was the one blowing up.
I knew the guy, or at least one of the guys, who was caught on the wrong side of this trade.
It was January. Talk about the new year getting off to a rough start.
This particular gentleman had always been a reckless trader, in my observations from him.
But even he didn’t deserve this one!
It’s like I said, though, squeezes like this happen all the time.
I’ve been fortunate to have been on the right side of many of them over the years.
I’m not a “short seller,” per se, but I have and will short stocks when a really compelling setup develops.
I’m much more interested in finding opportunities where short sellers are vulnerable, though.
Humans act irrationally whenever money is involved. And short sellers, in my experience, tend to think they’re smarter than everyone else.
It makes it harder for these types of people to admit they’re wrong.
This is how short squeezes are born.
And we can make a lot of money on these moves in a short period of time.
Don’t be afraid of the short squeeze.
Embrace it.
Stay sharp,
JC Parets
Founder, TrendLabs