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$NVAX Falls -84.59% Friday, So Much For The Short Squeeze

Today we are going to write about the infamous short squeeze. Too often investors and speculators try and use the potential for a short squeeze incorrectly.

First, It makes no sense to buy a stock just because it is in a short squeeze. Contrary to what the media may report to you this is often a loser’s game. For years, I recommended stocks that were in short squeezes just because they were in a short squeeze.  That was the extent of how far our research went. That ended two years ago with a big advance in the research.

Why? Simply we created the ability to track how short sellers do each time they heavily short shares, which is very cool. No longer will I recommend a short squeeze without looking to see how the shorts have done historically.

If the shorts have a good batting average of making money, greater than 50%, when heavily shorted, then I will not recommend the name when it is in a short squeeze. Second, if the shorts have a batting average of less than 50% but they have made big money several times when it was heavily shorted, then I will not buy the name either. There is no reason to put yourself in harm’s way when we have 6500 stocks to potentially recommend as a long.

So a natural question is how do I determine when the short selling is heavy? Simply we look at the range of the short ratio over time. If the short ratio is the highest it has been in 5 years, then we say the short intensity is at 100%. My definition of heavy short selling is when the short intensity is above 80%. We then track it until it drops below 50%. We also track moderate short selling, above 50%. However, the sweet spot is heavy short selling. Now onto the good stuff and what happened Friday.

Earlier last week, I noted that Novavax ($NVAX) was heavily shorted again to some clients and prospects. Short sellers have made money 10 of 12 times when the short intensity level rose above 80% until the time it dropped below 50%.

When the shorts have a high batting average we assign a Heavy Grade on the Short Intensity of 5. Clearly, this name had a Heavy Grade of 5.

The first time that short sellers bet against it was in 1996 and they made 15%. The next time they shorted they pocketed 57%. For shorts this has been soak, wash, rinse and repeat time and again.

nvax

The average return for the shorts in this name when correct is 32.18%. Shorts made money 10 times when they shorted Novavax, so their batting average was 83%. 2 times they were squeezed and the longs made 20.78%.

With this type of history, why would someone try to play this from the long side when the shorts were pressing the stock? I do not know. Just remember the definition of insanity is doing the same thing over and over again with the expectation of different results.

But clearly, many of those long thought they were smarter than the shorts. Once again they were proved wrong  on Friday as the stock fell by -84%. That is not an error, yes it fell by -84%.

nvax-chart

Many big firms owned the stock according to recent filings.  The largest holder was Fidelity.

nvax-holders

As I talked to one of these holders on Friday, they told me that despite us being able to predict when such a drop was coming, they did not care to know about this data. It did not enter into their equation. They were fundamental in nature and this data would never enter into their buy or sell decision.

We like to follow the progression of data to information to knowledge. Data that is turned into information and then into knowledge seems worth knowing about. That is what we have done with short interest. Short interest is the data. The short intensity is the information. The Heavy Short Intensity Grade is the knowledge.

The ironic thing is that this knowledge is derived from fundamental analysis by short sellers. There are many other stocks in the biotech space that are vulnerable to a similar fate and we will be writing about some of them in the not to distant future.

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The Week Ahead: Lots Of Central Bank Action, Starts Today

1. Geopolitical Events. On Monday Japanese Prime Minister Abe speaks. On Tuesday President Obama will address the United Nations General Assembly. On Wednesday the FOMC and BOJ announce their latest interest rate decisions. On Thursday ECB Head Mario Draghi speak. The week concludes with the President’s Panel at the Philadelphia Federal Reserve.

2. Economic Releases. Releases of note this week include the weekly chain store sales, oil/gas numbers, mortgage applications and housing starts, existing home sales and leading indicators.

3. Earnings Releases. Notable releases include ASNA ADBE FDX LEN GIS RHT KMX CCL AZO FINL.

Monday, September 19:

Markets in Japan are closed for trading but Japan’s Prime Minister Shinzo Abe speaks in New York in a key speech.

Minutes from the Reserve Bank of Australia (RBA) are due out.

Tuesday, September 20:

Wells Fargo (WFC) CEO John Stumpf appears before the Senate Banking Committee to answer questions about questionable actions by the bank.

President Obama speaks to the United Nations General Assembly.

The Federal Reserve Open Market Committee (FOMC) begins a two day meeting.

August Housing Starts are due out at 8:30 a.m. EDT and are expected to fall to 1,190,000 from 1.211,000.

Wednesday, September 21:

The Federal Reserve Open Market Committee (FOMC) concludes a two day meeting and is expected to leave interest rates unchanged. Press conference to follow at 2:30 p.m. EDT with Federal Reserve Chairman Janet Yellen.

Overnight The Bank of Japan is out with its latest interest rate decision.

Thursday, September 22:

European Central Bank (ECB) President Mario Draghi speaks to the European Systemic Risk Board Conference.

August Existing Home Sales are due out at 10:00 a.m. EDT and are expected to rise to 5,475,000 from 5.390,000.

Also at 10:00 a.m. EDT, August Leading Indicators are due out and are expected to drop to 0.1% from 0.4%

Friday, September 23:

Several Federal Reserve Regional Presidents speak at the President’s Perspective Panel at the Philadelphia Federal Reserve.

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The Key To Today …Is Not To Panic

The Media is all excited as the S&P 500 was down a bit more than -1%. Now it is down -0.94%.  It is early in the trading day and I would like to make the following points.

1.On 7/5 the S&P lost -0.68%. On 8/2 lost -0.64%.  On 8/16 lost -0.55%.  On 8/24 lost -0.52%.

2.On each of those days the advance/decline line finished at -2723, -3,042, -2,220 ans -2,145.

3.So far today the advance/decline is at -3,952.

Therefore, today is pretty nasty so far…but I repeat it is early and we need to see if the buy the dip buyer emerges in the afternoon. Also, key a bottom that materializes by 10:30/11:00.

On days like this some perspective is needed. My oversold indicator is at 27 and usually this marks a low when it rises back above 30. The last time we got below this level was on the Brexit puke and that was a great buying opportunity. I will alert all here when that happens.

Maybe a test of 2150 has to happen before a bottom is in. Maybe not. Currently, we are 9 points away from that.

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The Week That Was, The Most Hated Rally Continues

The week that was saw choppy action. The S&P 500 rose 0.05%. Monday was lower then Tuesday was higher. Wednesday was the worst day of the week dropping -0.29%. Thursday was the best day gaining 0.47%. Friday was lower.

The last time the S&P 500 move greater than +/-1% was on July 8th. As such, we are setting up for another such move. There have been 37 such days in 2016 but only one in July and none so far this month. Oh where oh where did volatility go?

Winners for the week were Conglomerates rising 3.3% and Services up 1.3%. Healthcare fell -08% for the week.

For the week stock indexes were mixed across the board. The S&P 500 rose 0.05%. The Russell 2000 fell -0.12%.

Each week I track the spread between stocks with a strong technical rank and those with a poor technical rank. Stocks with strong relative strength rose on average rose 1.34% and those with a weak relative strength rose at a slower rate 0.96%. The conclusion is that investors are not selling recent winners but letting them run. Moreover, buying weakness worked this past week and trying to short them did not.

Intraday action was all over the place this past week. Our confidence score on the intraday action was 51% after a strong week last week of 56%. The range is typically between 10% and 90%. On a intraday basis the Dow, S&P 500 and Russell 2000 have been higher for eight consecutive weeks. Pretty impressive.

For the month sectors in the red are Utilities, Energy and Materials. For the past three and six months, no sectors are lower.

The big worry for this week is whether profit taking take place as traditionally August is a tough month for stocks. So far, so good.

The week ahead sees economic data released for CPI, housing starts, industrial production, FOMC Minutes, leading indicator and Philadelphia Federal Reserve Manufacturing along with several weekly data releases like crude and natural gas inventories, jobless claims and mortgage applications.

Treasuries led by TLT rose 1.51%. Corporates led by LQD rose 1.06% while high yield led by HYG rose 0.90%.

Emerging markets (EEM) rose by 2.35% last week. Meanwhile, Europe (EFA) motored higher by 1.82%. China (FXI) also moved higher by 3.28%.

Conclusion: Investors continue to bid stocks higher especially outside the U.S. Failure to move above 2200 could bring 2100 into play.  The bottom line is the stock market is in the midst of the most hated rally in the history of the stock market where investors and professionals are both under invested as the fear of a repeat of 2007-2009 along with the upcoming election  has created a great deal of anxiety.

The stock market is in the midst of a “Buzz Lightyear Rally”, to infinity and beyond. Meanwhile, we remain with a bullish bias and are enjoying this move without much anxiety.

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Jackson Hole Is Now Moot

If  the July Retail Sales was another strong one, then yes the Federal Reserve Confab at Jackson Hole  could have been the Fed’s Waterloo. But it was not.

The fact is the July Retail Sales was anemic at best. The Federal Reserve cannot move with a data point like today’s retail number and who knows it may get revised in a month because IMO the data makes zero sense as the last several personal spending numbers do not validate this drop.

In fact, the chart below shows that personal spending just moved above personal income. A pretty interesting chart.

personal income and spending

Around 11:00 witness the Federal Reserve of New York cutting Q3 GDP to 2.4% from 2.6% and then closer to 12:00 the Atlanta cutting to 3.5% from 3.7%. Seems like they are in panic mode as well. But guess what, they can take some air out of the market so they will do it.

The best analysis of economic data I read day in and day out is Brian Wesbury of First Trust. I met Brian make in 1986 and have been a fan since I first met him. His commentary also is free and can be found on the First Trust website.

I am on the edge of my chair to what he says about today’s action. Once I know then I will post those thoughts here. Until then, have a great weekend.

 

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The Myth of Ramp Capital Part II

Yesterday I wrote about the 3:30-4:00 ramp.

 

Yesterday it was noted, “Since January, the best hours to own stocks are 11:00-12:00 and 12:00-1:00 when you track the Dow, S&P 500 and Russell 2000.  The chance of success here is 60% for both time periods. The next best period is 3:00-4:00. That batting average is down to 58%. It has been higher“.

In early trading today, the Dow/S&P 500/Russell 2000 sold off on the gap open. My definition of selling off is the opening print 9:30 to the close at 9:59. All three indexes were lower. Then we traded sideways from 10 to 11 with the ramp coming between 11 and 12.

If you knew that 11-12 is one of the two best hours year to date, then as you saw the move starting you would have the confidence to trade it. IWM moved 0.38% a nice move if you were able to play it. I did. Probably so did the HFT players.

There were several comments on why track hour by hour. The answer is simple. The HFT community starts new programs every hour on the hour. Personally, I think this is idiotic. It makes more sense to start a program when the intraday technicals indicate it is time to buy or sell.

Now we are at the beginning of the 1-2 time period which is the worst hour of the year statistically. As such, one should not expect much. Therefore, if we do move higher, then I would expect the rest of the day to have a positive bias. If we struggle, that is par for the course of 1-2.

Note one comment I made yesterday was that during the week of July 11-15 all three indexes struggled from 3-4 because they had made money earlier in the day and it was a big money week. If we get into the 3:00 hour  being up 15 or more points on the S&P 500 from 11 now, then Ramp Capital may not jam it to the upside from 3:30 t0 4:00. Especially with key several economic data points due out tomorrow.

The reason I model hours, days, weeks and months is that it gives me a perspective on what typically happens. Simply put this is a much better approach than guessing. Will not perfect, it does lead to a higher success rate.

The good thing about this piece is that come 4:00 you will know whether my analysis was useful or not.

 

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The Myth Of Ramp Capital

This is going to be controversial but I have the stats to back it up so have an open mind. Everyone talks about the bid from 3:30 to 4:00. I do not track 3:30 to 4:00 rather I track 3:00 to 4:00.

The reason is I track each hour of the market in hourly increments except 9:30 to 10:00 which I track as a half hour event. So here are the simple facts.

Since January, the best hours to own stocks are 11:00-12:00 and 12:00-1:00 when you track the Dow, S&P 500 and Russell 2000.  The chance of success here is 60% for both time periods. The next best period is 3:00-4:00. That batting average is down to 58%. It has been higher.

Ramp Capital does not put its money to work every day. Not even close.

The past two weeks 3:00-4:00 worked great 73% and 67% batting averages. This week so far is 83%. However, the weeks of 7/18-7/22 the batting average fell to 53% and 7/11-7/15 20%.

What is so odd about the week of 7/11-7/15 was a wipe out for shorts as stocks that were heavily shorted and weak technically rose 3.56% when the S&P 500 rose only 1.52%.

The point of all this is that is is important to understand the current phase of the market as it relates to Ramp Capital. i.e. the 3:30 bid. The money behind it has shown a tendency to disappear when the effect will not last into the next morning or that the money has already been made for the day like was seen the week of 7/11-7/15.

Therefore, today’s action is key to whether Ramp Capital is going to take a hiatus until after Labor Day.

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Biotech($IBB) Dragging Down $IWM

This morning the correlation is pretty obvious. Weak biotech thanks to several misses ($PRGO, $MYGN and $LLY). If you want to play $IWM today, then wait for $IBB to turn up.

iwmibb

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Why Buying A Short Squeeze Is Not A Good Idea Unless…

The worst trade idea I hear time and again on CNBC is to buy a stock because it is in a short squeeze. Every time I hear that trade I want to throw stuff at my television. Whoever, and there are many, makes this comment is just bringing the lambs to the slaughter at least 50% of the time.

My job is as a sheep dog to protect the lambs from the wolves (CNBC pundits) so take this to heart my flock.

Here is the skinny. It is a really bad idea to buy a short squeeze if historically the shorts make money when they short the name. It can be a really good idea if the shorts historically lose money.

For a long time our data could only identify if a stock was in a short squeeze or the shorts were correct. We did not calculate how the shorts did when they bet against a stock. Never again will I buy a short squeeze without first determining how the shorts did because we now calculate those numbers.

Today shorts in Advaxis ($ADXS) are getting taken to the woods as the bears run for cover. There is not a ton of history on this name but the last time that shorts came into this name they lost 611.40% before they gave up.

adxs

Now they are short again and coming into today had made 38.85% on the short side, really nice money for the short side. With the stock up 23.88% today their gains are rapidly fading away.

adxs1

What I know about this stock from the time that they lost 611% was that they stayed short for 234 days before giving up. That shows they are REALLY stubborn. I expect they will be just as stubborn this time around and soon short sellers will have a losing position.

The bottom line is that if you are buying a stock for a short squeeze or shorting a stock that is heavily shorted and you do not know how the shorts have done, then you are flying blind. As such, expect to have trades that may end up with substantial losses.

A perfect example of this today is $DRD or $GPRE.

 

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Quick Warning: The Bounce May Come Sooner Than You Think

Given that the S&P 500 has gone sideways since July 14th, it is VERY easy for the market to reach oversold status. With today’s drop, my proprietary oversold indicator is at 38 on $SPY already. Normally, such a move would take it to the 50s.

A test of 2150 seems in order on the S&P 500 and that may take the oversold indicator under 30. From there we wait for a move back above 30 to initiate aggressive long ideas.

We will keep you up to speed at this progresses.

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