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We found that the manic meltup on most short stocks like CVNA, W, and MSTR ultimately resembled sanity on the sell.
Heading into 2023, the stock market is definitely off to a good start. At the close of trading on February 2nd, the NASDAQ 100 (QQQ) was up a staggering 17.06%. The S&P 500 (SPY) is up nearly 9% on him.Lower Beta Earned by Dow Jones Industrials (DIA) that’s all 2.75%.
Great gains to say the least. In fact, it was QQQ’s best start since 2001. Still, QQQ’s extraordinary rally seems incomparable as the most shorted stocks have seen a crazy rally since the beginning of the year.
The 10 most shorted stocks in short interest rates showed a truly staggering gain of 75.28% on average from January 1st to February 2nd. Over 100% in the same timeframe. Carvana is up over 200%.
The table below shows their performance along with a comparison of the performance of the major equity ETFs.
Interestingly, not only were these three big outperformers significantly short, they also had very low ratings in terms of POWR ratings. CVNA and MSTR are strong sell (F rating) stocks, and W is a sell (D rating) stock. There are even more reasons to be wary of ferocious rallies.
Fast forward to Friday’s latest close and you can see that the biggest outperformer (QQQ) to start 2023 has turned into the biggest underperformer in the past week. While the Nasdaq 100 is down 4.5% and the S&P 500 is down over 3%, the Dow Jones Industrial is trading broadly flat with losses well below 1%. Mean reversion has started. The relative performance gap is starting to close.
A ridiculous bright red rally with a high beta Nasdaq name reminiscent of 2001 in performance. As mentioned earlier, 2023 was his best start to the year since 2001. However, there is a caveat. In 2001, the Nasdaq (QQQ) fell 20% in the remaining 11 months. Even if the year is off to a great start, it’s not all smooth sailing.
This is readily apparent in the recent performance of top short squeeze stocks. It reached a very overbought level technically before everything started cratering.
The three most heavily shorted names, who were previously leading higher in the insane Short Squeeze Rally, have finally hit the ground in a big way. Below is a brief synopsis of each.
Carvana is down 24% from its February 2nd closing price of $14.25. The stock actually traded to $19.87 that day, reversing course and closing near the lows. This type of price action is key reversal date It is often a reliable indicator of top of stock. Buyers are exhausted and sellers are in charge again.
A similar pricing pattern for Wayfair. The stock has fallen more than 28% over his past week. On February 2, he hit an intraday high of $74.25, but ended the day significantly lower. Another key flip day.
Micro Strategy (MSTR)
Again, chasing manic momentum in the name of low ratings never seems to pay off.MSTR has fallen 16.69% from its Feb. 2 high. Another representative offspring of the main reversal technical pattern.
With the uptick now stagnating, we expect high-quality, low-beta names to eclipse low-quality, high-beta names (and speculative ones) in the coming months.
It will become a market for picking the best stocks instead of just picking stocks. For the bulls, the Fed has become more a liability than an asset.
That’s where the POWR rating offers a big advantage. The highest A-rated strong buy stocks since inception are: S&P 500 more than quadrupled Since 1999.
Of course, shorting stocks to take advantage of a situation like the one you just saw can be expensive and risky.
Luckily, POWR Options offers a straight forward solution. Buying low-rated and overvalued stocks such as CVNA, W, and MSTR offers a distinct risk method of increasing returns at a low cost of as little as $500 per trade. Additionally, wait for the market to tell you when the bull market will end before opening a short position.
The POWR Options Portfolio recently made such a trade on one of these short squeeze names and has had good success so far.
If you’re looking for the best options trading for today’s market, check out our latest presentation. How to trade options with POWR ratingHere’s how to consistently find top options trades while minimizing risk.
If this appeals to you and you would like to learn more about this powerful new options strategy, click below to access this timely investment presentation now.
all the best!
Shares of MSTR closed at $243.37 on Friday, down $5.67 (-2.28%). Year-to-date, the MSTR is up 71.91% of him, while the benchmark S&P 500 index is up 6.70% of him over the same period.
About the Author: Tim Bigham
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 at First Options in Chicago. He appears regularly on Bloomberg TV and TD He contributes weekly to the Ameritrade Network ‘Morning His Trade Live’. His overriding passion is to make the complex world of options easier to understand and more useful to the everyday trader.Tim is the editor POWR option Newsletter. Read Tim’s bio and links to his latest articles.