The Most Shorted Stocks Rally May Lead To Contagion
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The Most Shorted Stocks Rally May Lead To Contagion

January 27, 2021

STOCKS – AAPL, AMD

MACRO – SPY, VXX

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It was a great day for heavily shorted stocks, with the most shorted index soaring by over 6.6%. The index is now up 88% over the past year.

What is happening in this group of stocks is, well, something I have never seen before in such an expansive way. Sure we all remember what happened to Volkswagen back in the 2000s. But I have never seen it across this many stocks by this type of extreme. Just look at the table below.  Essentially, these are among the most shorted names in the market. These were the gains for today only!

Mechanically, it is apparent why this is happening; it is a complex situation of deep out of the money call buyers, forcing the short-sellers’ hands, who then have to cover their stocks.

But what seems really strange is the borrow-rate for some of these stocks is still rising. When borrowers return their shares, and the stock becomes more readily borrowable, the borrowing rate should fall. But a stock like Game Stop has seen its borrow rate continue to rise. Today was the first time the borrowing rate has fallen.

It suggests that demand to short the stock is still incredibly high and that perhaps people have are still shorting it.

(Trade Alert)

Can this continue, I guess. But we need to think that if it continues, it really could hurt the market because all the funds and investors short these stocks are getting crushed, and it likely means they need to raise cash to pay for the losses sustained, and that means selling pressure.

I don’t know this will be the craziness that puts the market over the edge, but it has done plenty of technical damage. I don’t remember if I shared this chart with the free readers, but the trend was clearly broken today.

Then there is this short-term chart also showing a gap-open below an uptrend, never a good indicator.

Today, there is a little bit of nervousness, with the VIX surging 61% to 37.1!. Just systematic vol buying, nothing to see here.

I guess the point I made a couple of weeks ago is that VIX was in a permanently elevated state and that 20 to 21 was the bottom has proven to be right? I’d say Yes!

Apple (AAPL)

Apple reported results, and they were solid, much better than expected. But the company refuses to give guidance and minimal commentary. The market doesn’t like this, so the stock is falling. Maybe Apple never goes back to giving guidance; why should they?

There was massive options bet ahead of results, which made me think the stock would jump following results. If it can hold this $136-$138 region, I think it can push higher. But if it fails, then a drop to $124 would be the next region. (should be free to read – Apple’s Stock May Soar In The Weeks Following Quarterly Results)

AMD (AMD)

AMD was down 6% after it posted unimpressive margins. I don’t understand why they couldn’t get margin expansion, not a great sign for pricing power with all this growth. Maybe the stock finally breaks $87 and goes to $75. (Subscriber content on SA Marketplace – Earnings Analysis: AMD’s Results Are Not Nearly As Strong As They Appear)

That’s it, getting late, still more to do.

-Mike

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