The definition of a short squeeze is very simple. Lately, the media has been massively distorting the definition in dramatic fashion.
When short interest becomes outsized relative to historical averages AND then it begins to move up in price that is a short squeeze. Plain and simple.
For most of this year, short squeezes have been few and far between because stocks were in free fall the past two months. In fact, each week I track the following four patterns:
Short Squeezes Stocks doing well technically and heavy short selling on a historical basis.
Recognized Strength Stocks doing well technically and light short selling on a historical basis.
Shorts Are Correct Stocks doing poorly technically and heavy short selling on a historical basis.
Long Squeeze Stocks doing poor technically and light short selling on a historical basis.
Through the week ended February 12th, stocks that were Shorts Are Correct Stocks were making short sellers 19.83%.
Three weeks later and their gains were 0.00%. Yes sir, they gave up ALL their gains. So the shorts did not lose money rather they just lost their gains. Clearly, they are pissed and they will be back to inflict pain on the bulls when it makes sense to strike. We are not done with China, the price of oil and NIRP Central Bank action. Suddenly, we do not have a panacea.
In tracking, the spread between the Type 1 Short Squeezes and Type 3 Shorts are Correct over the last three weeks ended last Friday, March 4th the Short Squeezes were up 8.70% while the Shorts Are Correct were up 19.83%. That is epic action as my six year old would say.
I have been working with Phil Erlanger who I consider to be the expert on short interest for the past twenty two years. I cannot recall a week like we just had last week in the energy space. The average stock in the Energy Shorts Are Correct rose 21.54% while the average Energy Short Squeeze rose 10.48%.
Whiting Petroleum $WLL rose 82.73%. Yet year to date Whiting is down -27%. So if you were short Whiting coming into the New Year, are you being squeezed? Hardly.
By the way, the above Whiting exercise can be repeated on a myriad of Energy and Material names.
Percentages are a funny thing and crazy percentage gains impact those that had balls to get long in the last couple weeks. But those that are short from August or October or December still have nice gains.
The bottom line is until proven otherwise this is nothing more than a garbage rally and when stocks begin to fall again, the garbage sinks faster than quality does. Stick that in your pipe and smoke it.
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Great insight…much appreciated.