You’ve heard me say it a thousand times.
Let the market come to you.
Well, there may be no better time to heed that advice than right now.
It’s time to prepare your bear traps.
September is historically horrible for stocks – so you shouldn’t be surprised when volatility hits in the next couple weeks.
But, if you’re prepared and waiting for the market to get snared in your traps, you can make lots of money in that mayhem.
Let’s think about it another way…
Have you ever looked at the window of a store and saw what’s on display before deciding against going inside and figuring out what’s actually in there?
Take a look at this chart below.
This is total short interest for all companies in each of the ETFs…
My database goes out and grabs all of the companies that make up the NASDAQ 100, all of the companies that make up the S&P 500, and takes their individual short interest and combines it so that you’ve got a composite short-interest figure for each of those indices.
Now, what’s interesting here – notice how with that orange line, the QQQ, short interest has stayed higher over the last month or so. Meanwhile, the aggregate short interest on the S&P 500 companies has dropped.
What that tells me: Shorts have backed off the S&P 500 companies much more than they have the tech-heavy NDX.
Popular belief would have you say that we should see shorts coming down, because the shorts get squeezed.
But it hasn’t happened on the NDX stocks. The NDX stocks still have high interest.
Why’s that matter? Well, I gotta back this off a little bit and look at how we poke at the shorts as a contrarian indicator – as a market driver on the whole.
We’ve used the phrase “short squeeze” an awful lot over the past month and half, two months. I’ve used it as one of those blanket statements – Hey, if the market’s going higher, it’s gotta be a short squeeze.
But there’s a little catch here.
Short interest, at its heart, is a counter-intuitive contrarian indicator. Period. End of sentence.
What I mean by that is, short interest being added to a stock as the company is going higher is counterintuitive.
When shorts come in heavy, that’s when you get short squeezes that are a big thing. They’re actually one of my favorite filters to use.
Find the stocks that are in technically healthy patterns, and find short interest that’s building on them.
Whenever it has a “short-interest stamp of approval” on one of my trades, I love that trade. I love them all – just like your kids – but that’s a special one.
What stands out is when you find companies that have short interest on them that are in crappy trends, and it’s going higher as the stocks are going down.
Look at the chart of the NASDAQ 100. The short sellers have hunkered down.
They’re sitting around, waiting, because they know they’re on the right side of the trade.
The truth is, short sellers are more often right when they are going with the flow of a bear market. They often account for short-term bottoms because they are taking profits on positions, not adding to them.
Simply put, the QQQ is currently propped up, which means it is the time to buy puts.
If you’re setting bear traps, now’s the time to do it before volatility hits and you have to pay an extra 10% for your premium.
If I can buy more time right now, and pay just a little bit less for that time? I’m getting a discount on the days that I’m purchasing by going out to October right now.
Believe me, when September volatility hits, those October options are going to be priced a lot more, and that helps me getting into them right now.
It’s really a crappy setting if you’re going out there and day trading on your own. You’ll get whiplashed all over the place.
That’s why we let the market come to us. Set your bear traps. Start preparing now.
If you still have questions, make sure to tune into The Long and Short of It tomorrow morning. I’ll be talking about it a lot.
You’ll thank me later.
Quantitative Specialist, Penny Hawk
August 31 2022