Instead of Hoping for a Short Squeeze Lotto Ticket, Try This
They’re baaaaaaaaack.
After weeks of writing about cryptocurrency gyrations, mainstream media finally got a narrative they can sink their teeth into…
Source: CNBC
That’s right, the ragtag Redditors are at it again, sending shares of meme stonks back to the moooooon.
Shares of Blink Charging (NYSE: BLNK) were up as much as 8%, and GameStop Corp. (NYSE: GME) was up as much as 18%.
But it was AMC Entertainment Holdings Inc. (NYSE: AMC) that is really coming out ahead, approaching a 20% gain a couple times during Wednesday’s session, and tacking on another 15% Thursday.
For those of us who track money manager positioning through the Commodity Futures Trading Commission (CFTC), this move doesn’t exactly come as a shock.
Hedge funds have been buying downside protection on small-cap stocks (via E-mini Russell 2000 Futures) all the way down to the bottom.
And in fact, they bought so many puts, they are more than two standard deviations shorter than at any time over the past year.
Source: CFTC, Seawolf Research
Worse, long/short hedge funds are crowded into the same old tired trades — pushing short interest in Reddit favorites like GME and AMC well over 20%, and 2020 pandemic losers like Children’s Place Inc. (Nasdaq: PLCE) and Academy Sports and Outdoors Inc. (Nasdaq: ASO) even higher.
Those last two in particular could prove especially dangerous, as both have incredibly easy annual comparisons, and are largely now in good financial shape with positive outlooks.
That is clearly being misunderstood by the market, and it’s coming back to haunt them.
Because when the last short sale goes through and we’re left with nothing but buyers, the shorts have to cover.
And we saw how that worked out last time for them.
Well guess what… small caps have already started to rip higher.
Source: Bloomberg
The circles above, by the way, are where we bought the dips, using the Direxion Daily Small Cap Bull 3X ETF (NYSEArca: TNA). I think there’s more to come, but let’s be smart and sell a little (one-eighth tranche) on this rip.
Meanwhile, PLCE has already resumed its rocket ride to the moon…
Source: Bloomberg
And so has ASO…
Source: Bloomberg
But there’s another high short-interest company with which you’re already familiar — Design Brands Inc. (NYSE: DBI) — that is falling back today.
Source: Bloomberg
That gives us an opportunity to re-acquire our previous one-eighth tranche at a lower price than when we sold it back in late April.
I’m not sure how many more opportunities like this we will get, but when the market gives us a gift, it behooves us to take it.
Looking Under the Hood at Durable Goods
The Census Bureau released April’s durable goods report Thursday morning, and headlines have been a mixed bag thus far.
Top line new orders fell by 1.3% on the month versus a 0.8% increase expected.
Source: Bloomberg
On the surface, that doesn’t look good.
But as we do with everything, let’s take a look under the hood and see what the real story is. If you’re a total nerd like us and want to look it up for yourself, you can find it here.
The first, and most obvious, thing I notice is that if we subtract out defense spending (typically lower during a Democratic administration), durable goods show almost no change from last month. I’ve highlighted this in the table below.
Source: U.S. Census Bureau
But more important might be the figure above it, which shows durable goods minus transportation (circled in green).
Source: U.S. Census Bureau
So if we remove the transport sector, we can see the mixed bag a little closer.
Source: U.S. Census Bureau
Nondefense aircraft and parts were way up on the month, while defense aircraft and motor vehicles were way down.
Now that implies a couple of things…
First, our long-term stake in Boeing (NYSE: BA) is on the road to recovery.
But secondly, that decline in auto manufacturing may have some knock-on effects with industrial metals demand (steel, iron ore, copper, etc).
And with copper bouncing off a higher low here, this is probably a good time to sell the one-eighth tranches in Ivanhoe Mines Ltd. (OTC: IVPAF), Freeport-McMoRan Inc. (NYSE: FCX) and the United States Copper Fund (NYSEArca: CPER) that I suggested picking up on a down day last week.
They’re up 8.9%, 3.4% and 4% respectively, over that time, and approaching 30% gains from where we first picked them up in February.
Not too shabby!
All the best,
Matt Warder
