Shorts and the Market

 In a nutshell, you buy when you think a firm's stock will rise and you sell when you feel that it will decline. This is the battle between the Bulls and Bears. This is the market. The history of price action within the market shows a bias toward buying. Even with the facts pointing to this conclusion, the pro-buyers has pushed for regulations against short sellers. You could only short a stock after an uptick. This is rigging! C'mon! In a down market, sellers would look to the most overpriced, overvalued company. However, the firm was probably declining with the market. You could not place your order because there was never an uptick. Anyway, that rule is no longer in place. Nevertheless, there are still limitations. If you decide to place a short sale with your broker, he must have shares to short. The only way that is available to the brokerage is margin shares. You may want to short a company, but you cannot purchase any shares. Story of life!

New Problem

If someone can build something, someone can find a weak link. In the past, the market has experienced heavy buying and selling. Generally, the market rises in steps like a staircase. It declines like an elevator. This has caused the market to put in place "circuit breakers." This is especially present in commodity trading. The market sets limits in daily action in the pits. In the exchanges, a pause may be put in place. This should have happened in the past two weeks. It is similar to what happened in the Capitol on January 6th. The Capitol Police knew of the dangers, but they did not take action. There inaction led to the results. The SEC did not take action. Big hedge funds and brokerage firms took heavy losses due to not utilizing the circuit breakers. The extreme number of orders overloaded the trading platforms. Margin calls were not able to be put in place due to settlement times. By the time the order was settled, the stock reversed its position. Now, we will hear a lot of whining. The problem is passing out the cheese. Biden won't help because he has his focus on the stimulus bill. This could be left to the bureaucrats. This means, rigging!

Economic Evangelist

wrote that he sees structural problems in our economy. This can only be fixed with quality jobs. If Biden gets his $15 minimum raise request granted, the relief will only be temporary. The market could resume its uptrend, but inflation will kill the wage gains. Quality jobs with a living wage is the only true answer for our deficit filled economy. So far, our Evangelist has been spot on! We see further declines in the market. At present, the commodities are indicating higher prices are coming. This is a diversion. However, not everything goes up in an up market and visa-versa. Keep an eye on Mosaic (MOS), X (US STEEL), and Dr. Copper. The market has a tendency to rotate into sectors on the way up and down. Chips have led this market up and they may lead it down. The market generally pauses after volatility like in the past month. It will digest and consolidate. The real conviction will be the action in King Dollar. We see it falling. If you want to live dangerously and you want to hop on the bandwagon of short sellers, this is the top ten.

*Ligand Pharmaceuticals 62%, Bed, Bath and Beyond 61%, Fubo TV 58%, Macerich 52%, AMC 52%, Pubmatic 51%, Tanger Factory Outlet 50%, Clovis 40%, Esperion 39%, and I Robot 37%.  

So, what is the "Short Squeeze?"

You think a stock is overvalued? You believe it should decline. You find that many investors agree with you as short interest in the shares is high. You place your position. Suddenly, high volume comes into the stock pushing it higher. Every uptick is money down the drain. You buy to cover, which in fact, pushes the stock higher. Other investors feel the pain and heat. They buy to cover and the stock rises again. The cycle will end, but one cannot remain solvent or convinced to ride out the story.  You have become a victim of the short squeeze. 

The most heavily shorted stock by dollar value is Tesla. 

Falling off a cliff...

So far, total losses by short sellers after one month in our new year is $71 billion. They had some wins, valued at $16 billion. The bottom line is $54 billion in the negative side of the ledger according to Ortex. The Russell 3000 has 68 stocks with 25% shorts according to Fact Set. The ten largest shorts are:

*GameStop, AMC, Bed, Bath and Beyond, National Beverage Co, I Robot, Pet Med Express, Macy's, Beyond Meat, Plug Power, Door Dash Inc, and Moderna. We said last week and we will repeat it here, this is a dangerous market! We still believe that after tomorrow and the "window dressing" period ends, the correction begins.