Baseball season is just a few days away.
We can get back to America’s favorite dictionary of baseball terms that make absolutely no sense and sound like they were invented by an eight year old.
Can of corn… A routine fly ball that a player can stand under to catch like the player is catching a can of corn off the top shelf of a supermarket.
Moon shot… A long, high home run.
Snowman… When a team scores 8 runs in an inning (because the 8 on the scoreboard looks like a snowman).
And what about Squeeze play… When a batter bunts the ball while a runner from third base breaks for home plate while the pitch is being thrown.
Here are a few examples as Opening Day approaches…
We know that same term in the financial markets, right?
As investors and traders, squeeze plays offer a great way to make money. Looking for a short squeeze example? Want to understand what a short squeeze is and why it matters?
Let’s talk about it. Play ball!
A Short Squeeze Trading Defined
Short squeezes are important because they’re events in the market that can fuel a dramatic change in a stock’s price.
They happen when investors bet against a stock (or short it) and must purchase the shares to cover their positions.
That can cause prices to rise fast because they are forced to buy the stock.
Let’s take a look at the short squeeze process…
When investors bet against a stock, they start by making a phone call. They’ll borrow shares from a broker and immediately sell them into the open market.
In addition, they’ll likely pay the broker a percentage to borrow the shares for a specific period (maybe 3% a month).
After selling the stock into the market, their goal is to buy the stock back at a lower price.
If the stock starts to fall, they can buy the stock back, pocket the difference between the sales and buying prices, and give the stock back to the broker.
But sometimes that doesn’t happen.
If something happens to the company (it beats earnings, it receives a buyout offer, or any other catalyst), demand for that stock might surge. When other investors start to buy the stock, it will drive the stock price higher.
Next short sellers will asset their losses. If they sold the stock into the market for $100, and now it’s trading at $120, they are down $20 because they have to buy back the stock at a higher price.
If the price starts to move even higher, they could face margin calls or demand for the stock back from the broker (who might want to sell the stock for a profit.)
At this point, short sellers start to buy back their stock to prevent bigger losses. That helps fuel the demand for shares on the open market, creating an even bigger move on the price.
Now, the demand is surging, the price is surging, and more players are buying the stock. It creates a price feedback loop that can push stocks with terrible fundamentals higher and higher.
What Stocks are Highly Shorted Right Now?
If you want to find stocks that are highly shorted, you’ll want to learn about High Short Interest.
This is a measurement of the number of shares currently being sold short compared to the total outstanding number of shares.
These are the stocks that are being pummeled by short-sellers who are borrowing the stock and pushing prices down due to the high volume of selling.
In the chart from HighShortInterest.com, you can see that roughly 76% of all Silvergate (SI) stock is now shorted. Bed Bath & Beyond (BBBY) is at 72%.
So, when is the best time to actually push for a short squeeze to happen?
Interestingly, it’s when my momentum indicator goes positive. At that time, you will see capital flush into the market and pour into higher risk assets. This includes the names on this list above.
In times of negative momentum, meanwhile, these stocks tend to take the biggest hit.
I’ll talk tomorrow about a stock that I love to short when momentum is negative and then buy when things turn around.
It’s called Charge Point Holding (CHPT), and it’s my favorite short-squeeze, momentum stock. I’ll show you how to trade it tomorrow.
To your wealth,
Garrett Baldwin
Market Momentum is Red
The markets are still red. A sideways pattern continues to emerge and we are locked in a peculiar range-bound pattern.
We’re a week away from adding a new stock to our value portfolio for Tactical Wealth Investor. You can sign up right here at a discounted Charter Member price. This special pricing is going away soon, so if you’re considering joining, now’s the time!
