Manic amalgamation in most shorted stocks like CVNA, W and MSTR has finally found a semblance of sanity with a sell-off.
It’s definitely been a good start to 2023 for equities. At its close on Feb. 2, the NASDAQ 100 (QQQ) was up a whopping 17.06%. The S&P 500 (SPY) climbed nearly 9%. The lower beta that Dow Jones Industrials (DIA) achieved only 2.75%.
Spectacular profits to say the least. It was indeed QQQ’s best start to a year since 2001. But the outrageous gains to start the year in the stocks with the most short positions make the outrageous gains in the QQQ seem tame by comparison.
The top 10 stocks with the most short positions by short interest rates had a truly mind-boggling average gain of 75.28% from January 1 to February 2. The top 3 stocks with the most short positions by short interest rates (Carvana, Wayfair and MicroStrategy) all posted gains over 100% in the same time frame. Carvana rose more than 200%.
The table below shows that performance, along with the comparative performance of the major equity ETFs.
Interesting to note that all three of these huge outperformers were not only severely shorted, but also had extremely low ratings from a POWR ratings perspective. CVNA and MSTR were Strong Sell stocks (F-rated), while W was a Sell stock (D-rated). Even more reason to be wary of the scorching hot rally.
Fast forward to the last close on Friday and you can see that the top outperformer (QQQ) to start 2023 has become the top underperformer over the past week. The NASDAQ 100 fell 4.5%, the S&P 500 gave up just over 3%, while the Dow Jones Industrial traded more or less sideways, losing well below 1%. Mean reversion begins. The relative performance gap is starting to narrow.
The ridiculously red-hot rally in the high-beta Nasdaq names is reminiscent of 2001 in terms of performance. As mentioned earlier, 2023 was the best start to the year since 2001. However, there is a caveat. In 2001, the Nasdaq (QQQ) fell 20% in the remaining 11 months. A good start to a year is no guarantee for smooth sailing.
This is evident in the recent performance of the best short squeeze stocks. They all reached extremely overbought levels on a technical basis before starting to crater.
The 3 names with the most short positions that previously led the insane short squeeze rally higher have finally fallen back to earth in a big way. Below is a brief summary of each.
Carvana (CVNA)
Carvana is down 24% since its Feb. 2 close at $14.25. Shares traded as low as $19.87 on that day, only to reverse course and finish near the lows. This type of price action is called a key reversal day and is often a reliable indication of a top in the stock. The buyers are exhausted and the sellers are back in charge.
Wayfair (W)
Similar pricing pattern to Wayfair. The stock is down more than 28% in the past week. Made an intra-day high of $74.25 on Feb. 2, then closed much lower on the day. Another important turnaround day.
MicroStrategy (MSTR)
Again, chasing manic momentum on low-rated names never seems to pay off. MSTR is down 16.69% since its highs on Feb. 2. Yet another billboard for an important technical reversal pattern.
With the rally stalling, I expect the higher quality, lower beta names to outperform the lower quality, higher beta (and speculative) names in the coming months.
It will probably be a market to pick the best stocks, not just any stock. Don’t Fight The Fed has become more of a liability than an asset to the bulls.
That’s where the POWR ratings come in handy. Since inception, the highest A-rated Strong Buy stocks have held the S&P 500 up more than 4x since 1999.
Of course, shorting stocks to take advantage of situations like the one we just saw can be expensive and risky.
Fortunately, POWr Options offers a straight forward and simple solution. Buying puts the low-valued and over-extended stocks like CVNA, W, and MSTR on a defined risk way to increase your returns at a low cost — just $500 or so per trade. In addition, we wait for the market to tell you when the rally is over before taking a short position.
The POWR Options portfolio recently made such a trade on one of these short squeeze names with good success so far.
POWR options
What to do now?
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All the best!
Tim Biggam
Editor, POWR Options Newsletter
MSTR shares closed Friday at $243.37, down $5.67 (-2.28%). Year-to-date, MSTR is up 71.91%, versus a 6.70% increase in the benchmark S&P 500 index over the same period.
About the author: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His main passion is to make the complex world of options more understandable and therefore more useful for the everyday trader. Tim is the editor of the POWR options newsletter. Learn more about Tim’s background, along with links to his most recent articles.
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