Squeeze Me(me)

Estimated read time: 5 minutes and 18 seconds

In this week’s market recap email

1. Market recap

2. Skills/methods I used this week

3. What's in and what's out of my portfolio

What Happened This Week

One month returns:

• S&P 500: Negative

• Nasdaq: Negative 

• Russell 2000: Negative

• Top holding position US Dollar: Positive

On Tuesday we received the Consumer Price Index (CPI) Report. This is one of the most sought after economic reports that measures inflation.

The results of the report showed inflation rose 8.3% YoY vs. consensus of 8.1%

On a monthly basis, CPI increased 0.1% compared to estimates that it would decrease by 0.1%.

For reference, the CPI benchmark is 'supposed' to be around 2% according to the Fed. We've blown past that benchmark big time...

When inflation is high the Fed can take action by increasing interest rates (i.e. the cost of borrowing). This is viewed as negative for the economy as there's no incentive to borrow money for business growth, but in their eyes the "only way" to drive inflation lower.

With a posting of 8.3% YoY increase in the CPI, the market caught wind that the Fed was going to have to take action by raising rates to get this number lower. They didn't react too kindly...

Tuesday, September 13th headlines post CPI report:

"Dow tumbles 1,200 points for the worst day since June 2020 after hot inflation report"

"The stock market plunge shows 'The Fed has the worst problem in the world' with inflation--and a recession is the only solution"

After days like Tuesday I like to glance at the headline narratives just to see people light their hair on fire. It's some of the purest form of entertainment, but more importantly a good example of tuning out narratives from the media.

Because haven't you heard? Bottom is apparently in:

Those who work for CNBC are not in the business of teaching you how to make money. They create narratives that will drive stories and clicks. That's how they make money...remember that.

Hey Jim, do you think a YTD return on the Nasdaq of -25% builds any trust? Asking for a friend.

Teaching Moment

Short squeeze

This phrase has dominated the markets for almost 2 years now. GameStop, AMC, and Bed Bath & Beyond are all households names because of it.

But what exactly is a short squeeze? And more importantly, how do you position yourself to be on the right side of one?

Before we get into the squeeze part, let's discuss what short selling is.

'Shorting' a stock is simply selling a security, that you do not own, in hopes of buying it back at a lower price - you're betting on the stock price to fall.

If you are able to buy it back at a lower price you can realize those gains; think of it like buying an Xbox for $300 only to return it a week later when it's on sale for $250 and GameStop (lol) gives you $50 in return.

We know this would never be the case, but in the land of short selling that is how profits are made. The opposite can hold true in this example - if you returned the Xbox and the price has jumped to $350, you would then be on the hook for paying GameStop and extra $50 just to return it!

Let's use GameStop, and the story of its epic squeeze, to understand what happened.

GameStop was viewed as a dying brand. No one was going into their stores to buy games when the world of videogames moved to online transaction. Amazon gave us the luxury to just order something and have it delivered. It was a dying brick-and-mortar business.

For investors, this was a green light to short GameStop - they were betting on the price of the stock to fall due to its deteriorating business.

As more and more people short a stock, the percent of the float increases.

Float = the total numbers of shares that are available for the public investors to buy and sell

% of Float Short = total percentage of shares held in a 'short' position

While there is no textbook number to reference, usually anything that has a % of float >20% is considered to be high - these are signals for a potential short squeeze

So what was GameStop's % float short when the epic squeeze happened?

ONE HUNDRED AND FORTY PERCENT (140%)

^Yep, about sums it up perfectly - in case you're confused on how you can exceed 100% of something you're not alone.

In the GameStop scenario, hedge funds were basically doubling down their bet that GameStop was going bankrupt. This lead to a situation of, using my own terminology here, "double-shorting" a stock.

People were out there shorting a stock that has already been shorted - sloppy seconds much??

This is what drove the float to be as high as it was, which ultimately turned some heads to our lovely Reddit and FinTwit crowd. What if GameStop wasn't as bad of company as many people thought? Maybe they have a fighting chance to save their balance sheet? F*** it, let's just buy it!

So buy they did, driving the price incrementally higher. As a short seller, this is your worst nightmare - panic ensues and you "cover" your shorts.

Covering = buying, buying = less supply, less supply = higher price

And voila, you have one of the most epic short squeezes in stock market history.

So how do you make sure you are on the right side of a squeeze?

• If the economic outlook is positive, finding companies with high % of float shorted (and fundamentals of the business are solid) is a great opportunity to ride a squeeze higher

• If the economic outlook is negative, avoiding companies with high % of float shorted will help you dodge a squeeze

In The Account | my top holdings

1. $UUP - US Dollar

   1. On days like Tuesday when the S&P is down 4.32%, you have to laugh that this position (which should be the top position in your portfolio) delivers you a 1.38% return.

2. UTILITIES

   1. If (or really when) rates start to suppress this position is only going to make even more sense to own. $XLU is a core holding at the top of the portfolio.

On The Radar | positions I want to build / sizing up

1. $GLD - GOLD

   1. Another rate-sensitive play that is having trouble with the 10yr still ramping, unlike Utilities. I will add back to this one once I see the 10yr, and also MOVE index (bond volatility) trend lower

Off The Grid | removed positions / short selling opportunities

1. TECH

   1. Last week I said I was adding to $META and $NFLX shorts. Yeah, I think that was the right call (thanks CPI print). We book some gains after huge swings, but keeping those shorts, $QQQ, and $XLK for the long run.

2. RETAIL

   1. A good call on shorting $XRT last week

3. EUROPE

   1. Yes, recession risk is still very much a thing in Europe. That didn't go away since last week...

Let's check in to see what "world-renowned" hedge fund manager Cathie Wood is doing:

When your ETF is -50% YTD I guess you have to average out the cost basis? Have a great weekend Cathie!!!!!

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.