Despite that 500-point reversal to the upside on Friday, the Dow Jones Industrial Average and other major indices remain mired in a series of lower highs. On one hand, we must wonder what propels the market out of this deadly down channel. On the other hand, every time it looks like the bottom is going to drop, stocks stage impressive rebounds.
At some point, one of these must give. The question is will major indices reverse the 2018 trend or will the constant downside test take a toll that leads to a major correction?
This week the market must find a way to pick up on Friday’s momentum as earnings season fades and the biggest economic data of the month is in the rearview mirror. Big news on China, NAFTA and North Korea could help, as they have certainly been anchors for stocks.
The wild market ride continues, but this time the massive reversal was to the upside as the Dow Jones Industrial Average erased a 151-point loss on Friday to finish the day +3 points.
Each S&P sector rallied on the session led by technology, which rallied on news that the most famous value investor in history, Warren Buffett, bought 75 million more shares of Apple (AAPL) in the first quarter of 2018. There were also reports that the iPhone X was the best-selling smart phone in the world.
Consumer Discretionary (XLY)
Consumer Staples (XLP)
Health Care (XLV)
Real Estate (XLRE)
Apple not only lifted technology stocks, but it also shared the winner circle with stocks with heavy short positions. Remember, shorting allows one to sell a stock they don’t own in hopes of buying it back later at a lower price and pocketing the difference.
In the month before Apple reported its earnings, the short position climbed to 43 million shares from 33 million shares. During that period, Wall Street analysts became extremely negative on the company using any anecdotal news to drive the shares significantly lower.
- On March 12th shares were changing hands at $181 a share
- On April 27th shares were down to $162 a share or 10.4%, as billions of dollars in wealth was wiped out
This kind of stuff always happens with Tesla, which explains the CEO’s unseemly outburst during the company’s conference call. However, Elon Musk took to twitter to try to explain his reactions.
First, it’s important to know that Tesla is the most shorted (meaning most bet against) stock on the market & has been for a while
The 2 questioners I ignored on the Q1 call are sell-side analysts who represent a short seller thesis, not investors
Tesla has been a target of short-sellers for years, and to be honest, the shorts have largely been taken out on their shields. The problem, as all investors understand, is stocks and the overall market come down a lot faster than it goes up, and it’s often easy to engineer panic.
There is nothing wrong with shorting as an investing and trading strategy. I asked trading subscribers to short Tesla on March 19, but there is something unfair when shorts, and their allies in research departments, along with the media, layer on negative stories that can take on a life of their own.
Be that as it may, other huge winners Friday that squeezed the shorts include:
- Shake Shack 57%
- Wing Stop 29%
- Pandora 32%
If this market gains traction and breaks through this down channel, we could see monster short squeezes.
My Top Short Squeeze Candidates
- Restoration Hardware (RH)
- Cheniere Energy (LNG)
- Campbell Soup (CPB)
The major indices are extending the rally from Friday and are all in the green. In merger news, Elliott makes all-cash offer for Athenahealth (ATHN) for $155-$160 per share.