Where's the short base? What happened to it? We've been rocky now for months on end. We have had two huge downdrafts this year. We've had a cessation of tech takeovers. We've had multiple earnings misses. We've had absolutely nothing good from the White House since the year began. We've had international instability galore. We've got inflation and disappointment and a giant leap in interest rates in the last year.
And there's no short base, in this, a short gangsta's paradise.
How do I know this? Because we have stocks with earnings that have been mildly disappointing and their stocks have been wrecked, I mean, crushed, which would typically not be the case at this point in the cycle. You would have hedge funds militating against stocks and you would see stocks halt their declines not far from where they were.
You wouldn't see, for example, 3M (MMM) fall 40 points from its high over the course of a quarter and then fall another 20 points when it reported, as we did. You would see stocks base because they had already gone down. Same with a Procter & Gamble (PG) . I am astounded that it can go down and then go down and then go down some more. Typically, there would be a sense that "that's the worst it is going to get, let's cover."
But it seems like there's no one shorting to begin with.
Oh, we have the battleground shorts. We know there is a considerable short base in General Electric (GE) . But take a look at that stock. It reported an in-line quarter -- nothing better -- chief nemesis, who has been correct, took it a part once again saying nothing has changed. And what happens? It goes higher. Why? Because it is so heavily shorted that when sellers didn't come in they were forced to cover.
I think you got the same thing in Facebook (FB) where there were many people betting against it, and the company didn't disappoint or give you any sign that there had been any substantial slowing for the controversial quarter they now find themselves in.
Lululemon's (LULU) got some short, too, and that's been up dramatically.
It's a sign that there's no one who seems to need to cover and declare victory.
Why is this?
I think it is because the shorts are all blown out save the hardcore shorters, like Jim Chanos, on Squawk Box today.
I think it's been so long since individual stocks broke down on earnings and the tape has been so buoyant that they took the money away from those who systematically bet against stocks. There really is no other explanation that I can find for the freefall that we have seen, the asymmetry, where stocks go up but can't stay up and stocks that go lower, then go lower some more.
Classic example? JPMorgan Chase (JPM) . When the company reported a monster good quarter it rallied three bucks in early trading. But then it just went into freefall and there's no buyers. Same with Goldman Sachs (GS) . Have you seen that stock? You would think that the shorts would say "okay, enough, we made our money."
Because there are no shorts to speak of.
Without that natural base of coverers you get no bounce.
Now what's amazing to me is that there still seems to be fear of missing a rally or fear of what could happen if people do short. Are they all scared that they could be runover by a Boeing (BA) ? Do they worry that they could be the next roadkill for Norfolk Southern (NSC) ?
It makes no sense to me.
Let me leave you with one last example. We got one of the greatest upside surprises I have seen in ages when Netflix (NFLX) reported.
What has it done?
How about rally up pirouette and then get crushed.
It wasn't risk free. You had to take some pain, but you had rather instant gain.
I would think that would be the ultimate inspiration to lay down on a stock.
It just doesn't seem to happen anymore.
I can tell you this. If I were back in the game, if I were trading at my old hedge fund, I would be running a fifty percent short book. It's just too easy right now with an unstable situation in Washington, rising inflation, late cyle, Fed raising rates.
I don't know. We aren't in a risk-free short-zone. Not with a Facebook or a Norfolk Southern or a Boeing.
But it sure does feel like it. Nothing's been resolved positively of the big macro issues yet there are strong buys all over the place and analysts caught leaning the wrong way galore.
The preponderance of evidence, however, says, start shorting. You're likely to make a lot of money in an environment where stocks can't keep their gains and when things turn bad have no floor whatsoever.
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