This Is Not A Short Squeeze Market

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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I was light on commentary last week as my father in law passed away on Monday in Texas. The week was focused on family and helping my wife and her siblings get through this tough period. Here is what is on tap for this week.

The Dow Jones Industrial Average, the S&P 100, Russell 2000 and the NASDAQ 100 all rose for the third week in a row.

1.Geopolitical and Fiscal Events. Monday sees Federal Reserve Vice Chairman Fischer speak. EU Finance Ministers meet on Monday as do EU Leaders. Tuesday sees several primaries and caucuses. Thursday sees the ECB announce its latest decision and hold a press conference. Friday sees Fitch announce its latest rating on Greece.

2.Economic Releases. Releases of note this week include the weekly chain store sales, oil/gas numbers, mortgage applications and there are no other releases of note.

3.Earnings Releases. Notable releases include CASY URBN DKS NAV SQ EXPR DG ULTA BKE GCO.

Monday, March 7:

Federal Reserve Vice Chairman Stanley Fischer speaks at 2:30 p.m. EST.

Markets are closed in Russia.

Euro Zone Finance Ministers meet to discuss reforms in Greece and Cyprus.

European Union (EU) Leaders hold an emergency meeting on the refugee crisis.

Tuesday, March 8:

Markets remain closed in Russia.

Primaries and caucuses are held in Hawaii, Idaho, Michigan and Mississippi.

Wednesday, March 9:

The latest short interest data from the NYSE and NASDAQ is released after the close for data collected from 2/9 through 2/24. The S&P 500 rose 4.19% during that period.

Peace talks resume in Geneva on Syria.

Thursday, March 10:

The European Central Bank (ECB) will release its latest interest rate update. Then at 8:30 a.m. EST ECB Head Mario Draghi will speak at 8:30 p.m. EST.

Angie’s List (AWI) holds its analyst meeting and is a Type 4 Long Squeeze.

Index futures March contracts roll over to the June contracts.

Friday, March 11:

Fitch reviews their rating on Greece.

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February 29, 2016

1.Geopolitical and Fiscal Events. Wednesday sees Federal Reserve San Francisco President John Williams speak at 10:00 a.m. EST. Friday sees Federal Reserve Governor Lael Brainard speak in Washington to the Institute of International Bankers.

2.Economic Releases. Releases of note this week include the weekly chain store sales, oil/gas numbers, mortgage applications and Chicago PMI, pending home sales, construction spending, ADP Payroll, ISM Index, factory orders, ISM Services and monthly employment data.

3.Earnings Releases. Notable releases include VRX ENDP MDT BNS COST SINA KR AVGO SPLS BIG.

Monday, February 29

China Manufacturing PMI is due out at 8:00 p.m. EST.

Bank of Australia releases its latest interest rate decision at 9:30 p.m. EST.

Tuesday, March 1

January Construction Spending is due out at 10:00 a.m. EST and is expected to rise to 0.3% from 0.1%. At the same time, February ISM Index is expected to rise to 48.7 from 48.2.

12 states hold primaries on Super Tuesday.

Wednesday, March 2

ADP Payroll for February is due out at 8:15 a.m. EST and are expected to fall to 185,000 from 205,000.

The Federal Reserve March Beige Book is due out at 2:00 p.m. EST. China Service PMI is due out at 8:45 p.m. EST.

Thursday, March 3

January Factory Orders are due out at 10:00 a.m. EST and expected to improve to 3.0% from -2.9% At the same time, February ISM Services are due out at expected to drop to 52.9 from 53.5.

Friday, March 4

February Nonfarm Payrolls are released at 8:30 a.m. EST and is expected to move to 180,000 from 151,000. The Unemployment Rate is expected to remain at 4.9%.

Mor

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This morning $SPY had a gap open. It has moved lower since that open. Not a big deal for me, or Bobby Axelrod, as the 9:30 o 10:00 and 10:00 to 11:00 have struggled all week. The real time to get long is 11:00 a.m. and the only other weak period this week has been 2:00 to 3:00 p.m. EST.

The more important thing about this morning is $SPY opened above its 50% retracement from the November high to the January low, $196.34. Currently, SPY is at $195.77. Once, $SPY moves back above the 50% retracement the next level is $199.96 which is the 61.80% retracement.

Our overbought/oversold indicator is now at 69. Key is it staying above 50 for those long. The ability to move and stay above 70 would be our first period of “good overbought” in 2016. During the run in October, $SPY was able to stay above 70 for most of the move.

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I have read and heard a ton the past two weeks about the “massive short squeeze” underway. Nothing could be further from the truth.  There is VERY little pressure on the shorts. There is a TON of pressure on the longs.

How so? The S&P 500 is lower by -5.58% year to date. The Russell 2000 is lower by -10.02%. According to hedgeindex.com, here is the style breakout by the hedgies through the end of January with February numbers due in the next couple of days:

Dedicated Short Bias   9.48%

Equity Market Neutral -1.17%

Long/Short Equity        -2.78%

Long only funds will have returns between the S&P 500 and the Russell 2000.

For the month of February, the S&P 500 is -0.54% and the Russell 2000 is -1.28%. So the long only managers continue to bleed while the Dedicated Short Bias should see returns above 11% based on the numbers we have detailed.

Through the end of January 1,777 stocks were up or flat for the year and 4,954 were lower. So 74% of stocks were lower for the year. 1,985 had lost -10% or more so of those down 40% lost more than -10%. That means shorting is like shooting fish in a barrel.

This means if you are not a good stock picker, then likely you are underperforming the indexes.

Since the beginning of the year the average short squeeze stock, defined by Phil Erlanger who I work with day to day, has lost -14.84% meanwhile the average stock that is heavily short and the shorts have gotten correct has fallen by -14.44% which means folks that the shorts are minting money compared to what the longs are doing.

In fact, the -14.44% number comes after last week’s up week that saw those heavily short and the shorts have gotten correct rise by 5.39%. So before last week, the shorts were up almost 20%. Now they are up 15% and many longs are down that much.

That my friends does not make for a short squeeze. The shorts are living large right now.

More on this tomorrow when we parse through the latest short interest data.

 

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1. Geopolitical Events. On Tuesday Minneapolis Federal Reserve President Neil Kashkari will speak on the economy at 8:30 a.m. EST and Federal Reserve Vice Chairman Stanley Fisher speaks at the same time. Also on Tuesday IMF Head Christine Lagarde will speak from Dubai before markets open. On Wednesday Richmond Federal Reserve President Jeffrey Lacker speak at 8:00 a.m. EST, Dallas Federal Reserve President Robert Kaplan at 11:45 a.m. EST and St, Louis Federal Reserve President Bullard will speak at 6:30 p.m. EST in separate events. President Obama will meet with King Abdullah of Jordan on Wednesday. On Thursday San Francisco Federal Reserve President John Williams will speak at 12:00 p.m. EST.

2. Economic Releases. Releases of note this week include the weekly chain store sales, oil/gas numbers, mortgage applications and consumer confidence, existing home sales, new home sales, durable goods, Q4 GDP, Personal Income and Michigan Sentiment.

3. Earnings Releases. Notable releases include MSI LNT HD BMO RY LOW BUD KHC AMT SRE.

Monday, February 22:

The Mobile World Congress begins in Barcelona, Spain.

Tuesday, February 23:

International Monetary Fund (IMF) Head Christine Lagarde speaks from Dubai.

Saudi Oil Minister Ali Al-Naimi speaks in Houston, working on getting time.

February Consumer Confidence is due out at 10:00 a.m. EST and is expected to fall to 97.5 from 98.10.

At 10:00 a.m. EST, January New Home Sales are expected to fall to 5.35 from 5.46 million.

Wednesday, February 24:

President Obama meets with King Abdullah of Jordan at the White House.

January New Home Sales are due out at 10:00 a.m. EST and are expected to fall to 520,000 from 544,000.

The latest NYSE and NASDAQ Short Interest Data are due out after the close.

Thursday, February 25:

January Durable Goods are expected to improve to 2.5% from -5.0% at 8:30 a.m. EST.

Friday, February 26:

Q4 GDP is released at 8:30 a.m. EST and is expected to move to 0.5% from 0.7%.

January Personal Income is due out at the same time and is expected to rise to 0.4% from 0.3%.

At 10:00 a.m. EST February Michigan Sentiment is due out and expected to fall to 91 from 91.7.

Germany and Greece have its credit rating reviewed by Moody’s.

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Last week it was noted that I have an oversold indicator that through time is highly correlated to The Fly’s oversold indicator. My model reaches oversold when below 30 on a daily basis. SPY was at 29.21 on the oversold indicator when we first wrote intraday about it. QQQ and IWM were in the low 20s.

The problem all last week long was that the score on SPY could not close below 30. SPY did close Thursday night above 30 and I let you know this on Friday at 11:27 a.m. EST when the score was 38 intraday with SPY at $185.88. SPY is now at $192.03 good for a move of $6.15, not too shabby.

The key point in our last update was getting the indicator above 50 and staying there. The score yesterday got above 70 and failed to hold that level. In fact, the score has not moved above 70 since late October. This is bad. Failure to launch and stay above 70 is the killer of bear market rallies. Prepare to reenter the ark.

Today we are failing at the 38.2% retracement from the November high on SPY to the January low, $192.72. This is a huge warning sign to me and therefore I am out for being a  buyer of this rebound.

 

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In my opinion, this is as big a suckers rally that I have ever seen. My points are as follows:

Last Friday began the up move and it was not validated by the advance/decline line. On January 29th the S&P 500 rose 2.48% and the advance/decline line was 4,151, Then on January 22nd the S&P 500 rose 2.03% and the advance/decline was 4,258. Last Friday is was 3,261 which is not representative of a 2% move.

Second, at last Thursday’s low, we again had the chance to test the October 2014 low on SPY of $180.92 and fell to $181.09. I wrote back in January that the January 20th low of $181.02 wasted the opportunity to test the October 2014 low. Mark my words the computers know this level and are waiting patiently for it to be taken out and then test how far we can drop from there.

Third, this up move from Friday through today saw my oversold indicator go from 30 to 68. Such a move in three days is too much too soon. In fact, my oversold indicator has not been able to move above 70 since late October. That is bad. There is bad oversold and bad overbought as well as good oversold and good overbought. Currently, we are on the brink of another bad overbought indicator since last July.

Fourth, options failed to get extreme on last Thursday’s low but then did back on January 20th. I use a proprietary rank from Phil Erlanger that looks at open interest, premiums, money flow and volume over the last ten trading days using median averages. It kills it time and again at meaningful lows. Thursday was not a meaningful low with extreme options sentiment on the put side.

Last, short interest IS NOT heavy. Quite the opposite. It is barely average. At the September low, it was off the charts. Ditto in February of 2009 and almost every meaningful I have seen since 1993.  I really fear the shorts got blown out the last three days and now there is no one short and short interest drops back to below average.

Then once the buying dries up, and it will, then stocks move into long squeezes, i.e. no one is short and the technicals suck. The poster child for this Starbucks which has a short ratio of 1.44 with an Erlanger Short Intensity of 27%. Another break of $55 and this name could go to $40 on a break of $50.

The inability of people to understand the true dynamics of short interest data is rather telling and I will prey on those that make such claims as short interest is really high now.

Look I want to be bullish. Business is much easier when we are in a bull market and the “legally blind” are making money. Instead we have been in environment where the “legally blind” have been getting their clocks cleaned since mid 2015.

P.S. I am not bearish right now either as the Model Short Portfolio I run for Erlanger Research is 25% short and 75% cash. I felt that as of last week, the downside had run its course and shorts would be more difficult money makers. Year to date that portfolio is up 3.99%.

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Last week it was noted that I have an oversold indicator that through time is highly correlated to The Fly’s oversold indicator. My model reaches oversold when below 30 on a daily basis. SPY was at 29.21 on the oversold indicator when we wrote intraday. QQQ and IWM were in the low 20s.

The problem all last week long was that the score on SPY could not close below 30. SPY did close Thursday night above 30 and I let you know this on Friday at 11:27 a.m. EST  when the score was 38 intraday with SPY at $185.88. SPY closed today at $189.44 good for a move of $3.56, not too shabby.

The key point from here is getting the indicator above 50 and staying there. So far so good as the score is 59.19. That will indicate a potential move of 100 to 200 points could be in the cards or 10 to 20 points on SPY.

Wednesday should be a key day to see if we can add some more points to the scorecard. Why? There have been zero 3 day winning streaks in 2016 on the S&P 500. Will this be the first or will it fall into trend.

Personally, I would like to see a down day and then see how quickly the massive number of bottom callers fold. From the ashes of the bottom callers, then we can begin a meaningful rally.

P.S. If you think that shorts are going to help the bulls, NFW.  Short positions are light and have been since October, despite what some shoddy research firms are stating. In fact, the shorts are cleaning house by my calculations. YTD the traditional short squeeze name has lost -17.71% while the stocks where the shorts have been correct have lost -19.83% , which means the shorts are up 19.83%. With those types of returns, the “Greek Hedge Dog” can buy himself a nice round of the finest inequities he cares to dabble in.

 

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1.Geopolitical and Fiscal Events.

Monday sees President Obama host the Association of Southeast Asian Nations. Also, on Monday ECB Head Draghi speaks to the European Parliament as does British Prime Minister Cameron on Tuesday.

Philadelphia Federal Reserve President Patrick Harker, noted Hawk, speaks on the economy Tuesday at 9:00 a.m. EST as does new Minneapolis Federal Reserve President Neil Kashkari at 10:30 a.m. EST and is then followed by Boston Federal Reserve President Eric Rosengren, a dove, at 7:30 p.m. EST.

Wednesday FOMC meeting minutes due out and St. Louis Federal Reserve President Bullard, a moderate, speak at 6:00 p.m. EST.

Thursday sees San Francisco Federal Reserve President John Williams, a moderate, speak at 3:30 p.m. EST. Friday sees Cleveland Federal Reserve President Loretta Mester, a noted Hawk, speak at 8:00 a.m. EST.

2.Economic Releases. Releases of note this week include the weekly chain store sales, oil/gas numbers, mortgage applications and housing starts, PPI, industrial production, Philadelphia Fed Survey, leading indicators along with CPI.

3.Earnings Releases. Notable releases include ESRX HRL PCLN DPS WMT DISH VFC DE.

Monday, February 8

Markets are closed in the United States for observance of Presidents Day. Canadian markets are closed for Family Day.

President Obama begins a two day summit with leaders of the Association of Southeast Asian Nations in California.

European Central Bank (ECB) Head Mario Draghi addresses the European Parliament. Tuesday, February 9

Tuesday sees British Prime Minister Cameron addresses the European Parliament.

Wednesday, February 10

Federal Reserve Open Market Committee (FOMC) January meeting minutes are due out at 2:00 p.m. EST.

January Housing Starts and PPI are due out at 8:30 a.m. EST and are expected to rise to 1.18 million from 1.15 million and remain at -0.2% respectively. Then at 9:15 a.m. EST, January Industrial Production is expected to improve to 0.4% from -0.4%.

Thursday, February 11

The European Union Summit begins in Brussels.

February Philadelphia Fed Survey is expected to improve to -2.5% from -3.5% at 8:30 a.m. EST. Then at 10:00 a.m. EST, January Leading Indicators are expected to improve to -0.1% from -0.2%.

Friday, February 12

January CPI is released at 8:30 a.m. EST and is expected to remain at -0.1%.

Spain had its credit rating reviewed by Moody’s.

Saturday sees South Carolina hold its Republican primary while the Democrats have a caucus in Nevada

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