The Dow and S&P 500 are headed back toward all-time high territory, but the big hedge funds out there are still selling stocks short - and getting crushed.
And believe it or not, the short-sellers are actually becoming more, not less, active as we approach the summer.
I guess they'll never learn...
In the hands of millions of regular investors and day traders, the short squeeze is nothing less than the market's hottest trade right now. Stocks like Blackberry Ltd. (NYSE: BB), AMC Entertainment Holdings Inc. (NYSE: AMC), and GameStop Corp. (NYSE: GME) are taking off like fireworks on the 4th of July.
Now, those trades, clearly, have already paid off; getting into a stock like AMC or GameStop right now would be risking a lot for table scraps.
But because hedge funds will be hedge funds, I'm always looking out for a good short-squeeze stock, and I'm here to let you know I've found the perfect one.
It's perfect because the market hasn't figured this one out yet - and the hedge funds haven't figured out we're on to 'em...
The Short Squeeze "Scene" Is Heating Up
The short squeeze trade was relatively quiet throughout April before heating up in May. Now, though, there are more than 187 short-squeeze candidates on my radar.
As the hedge funds are finding out (again), shorting a stock can be a dicey undertaking. And when I say "shorting," I don't mean trading puts, although those can pay off when a stock sinks. Instead, what shorting means here is "borrowing" the shares on margin, hoping they go down, and then selling them back and pocketing the difference.
Theoretically, anyone could short a stock, but in practice, hedge funds and institutions are the biggest practitioners because they have deep pockets. Anytime you short a stock, you're betting that the stock will decline and using margin accounts to do it - which means that you're leveraged.
If the stock goes down, the shorts are happy, and they pocket their profits - but it's a totally different story when a stock goes up.
When this happens, the shorts start feeling the pain as their leveraged losses add up quickly.
At some point, they have to call it quits and cover their positions to limit losses. When this happens, the entire group of shorts will start buying shares at any price in a panicked frenzy, causing the stock to go parabolic.
That's a short squeeze. And there's a natural life cycle to the trade. History shows that short squeezes play out over a four- to six-week period, culminating in that terrified buying frenzy that can send a stock like GME or AMC rocketing double-digits in a week.
And as luck would have it, another theater chain is the prime candidate for explosive profits over the next few days...
The No. 1 Short Squeeze Out There Right Now
I'm not talking about AMC - after a week and 100%-plus gains, that ship has sailed. I'm talking about Cinemark Holdings Inc. (NYSE: CNK).
Short sellers have been adding to their positions, raising the short interest ratio to 6.2 while the percentage of short shares to float is sitting just below 20% - that's not a typo, I said twenty percent!
The shorts have been piling on because of a perceived weakness in the fundamentals, but they're about to get an object lesson in the fact that it's speculation, not fundamentals, that really counts here.
Cinemark is a "destination" theater that offers its customers a deluxe moviegoing experience - plush leather recliners, table service, gourmet food, and beer. In other words, it offers just about everything hundreds of millions of Americans have been missing - badly - since the shutdowns began last March.
On paper, the fundamentals are still iffy; the "reopening trade" hasn't fully impacted bottom lines yet, and that's part of the reason why it's being shorted to the tune of 20%.
The technicals, on the other hand, look great, particularly in the context of a highly shorted stock. CNK is trading above its bullish 50-day moving average, and we just saw a silver cross form as the 20-day moving average crossed above the 50-day.
To put this into perspective, the last silver cross was in November, right around the time the vaccine picture brightened, and the stock doubled, from $14 to $28.
I think over the next few sessions, as its shares edge higher on reopening momentum, the shorts will begin to feel the pain. Once that pain kicks in, it'll spiral quickly and end with the shorts throwing in the towel... and sending CNK back to levels we haven't seen in more three years.
I'm targeting a move to $35 over the next four to six weeks, which would be just shy of 60% higher from here.
Would I take 60% profits on one single stock? Absolutely - any day of the week. Thing is, if you're actively trading these stocks, the profit potential can be even bigger...
My friend and colleague, Andrew Keene, has tweaked his proprietary, powerful S.C.A.N. algorithm to search out what he thinks are the two biggest, best indicators of an impending short squeeze situation. When one hits his screen, he lets his subscribers know with a trading research recommendation - entry and exit instructions included. Andrew's readers recently got a crack at closing two 100% winning trades since May 20. That's how big and fast the profit potential can be in a squeeze. You can hear from Andrew himself how this works - just click here.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.