The stock market has staged a remarkable rally so far in 2023. But here’s a question for you: What do this year’s biggest stock winners have in common?
Most of them have been the result of a short squeeze.
A short squeeze happens when investors bet against a stock, “shorting” it. Then something unexpectedly good happens to that stock, creating a bunch of buying pressure. That “squeezes” the shorts to cover their positions, which creates even more buying pressure.
The typical result? A meteoric rally in the stock.
A Year of Short Squeezing
We’ve seen this happen a lot this year.
Take Carvana (CVNA), for example. Everyone thought the used-car retailer was doomed to collapse under the weight of its huge debt burdens. Short bets against the stock piled up. About 40% of the float was sold short.
But Carvana didn’t collapse. Instead, the economy restabilized in 2023, consumers started buying used cars again, and Carvana’s financial trends meaningfully improved.
The shorts were wrong. And all year long, they’ve been getting squeezed. CVNA stock has soared 730% this year!
Or how about AI-powered lender Upstart (UPST)?
Most investors thought that the firm was doomed in 2022; lending dried up, and Upstart’s new models were put to the test. Short interest in UPST stock climbed to nearly 40% of the float.
But the company didn’t die. Instead, it has rebounded in 2023. And as it has, the shorts have been squeezed, creating a 150% monster surge in UPST stock.
The Big Gains Come From a Big Short Squeeze
These were companies that investors thought would buckle under the weight of the Fed’s big rate-hiking campaign in 2022. And as a result, investors bet heavily against each of those stocks.
But the companies didn’t fail. They survived the economic slowdown and have surged back to life in 2023.
The shorts have been squeezed. The stocks have soared. All are up more than 55% this year – while the Dow Jones Industrial Average is up just 6%.
You get the point.
We’ve seen a lot of short squeezes this year. They are behind some of the stock market’s biggest winners in 2023.
That makes a ton of fundamental sense. Remember all the bullish investors back in late 2022? Yeah, me neither. They were few and far between. Everyone was bearish.
The 2023 stock market rally caught most investors off guard, including short-sellers who upped their short bets in late 2022. Now those shorts are caught on the wrong side of a powerful bull market rally, and they’re getting squeezed. They’re being forced to cover. And the stocks they are betting against are soaring.
The Final Word on Short Squeeze Season
As of this writing, more than 105 U.S.-listed stocks feature an extremely high short interest of over 20%. More than 500 stocks have high short interest of over 10%.
In other words, a lot of stocks are still ripe for a short squeeze.
That’s why we think we are entering “Short Squeeze Season.”
We think that over the next few months, the outlook for a “soft landing” will increasingly become the consensus on Wall Street. That means no recession, no market crash, and higher stock prices.
As that becomes the consensus, short-sellers will start to throw in the towel after feeling the pain all year long. They’ll start covering in droves. And that’ll create a bunch of squeeze opportunities.
Is your portfolio positioned to win big from these squeezes?
If not, don’t worry – we have you covered.
You may have noticed that after furiously rallying all year long, the stock market has finally hit some turbulence here in August.
We’re using this volatility to buy the dip before the next leg higher in this rally.
And our dip-buying efforts have been partially focused on high-upside short-squeeze opportunities.
Recently, we bought the dip in two stocks ripe for a potential big short squeeze, each of which features >10% short interest and high potential for a big pop in the coming months.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.