Get Inside a Short Seller’s Mind

I recognize short squeezes almost intuitively. That’s because I was a short seller for ten years.

The market completely shifted in 2016 and I’ve shorted maybe one stock since then. But for a decade I was all short biased. Which means I know the fear short sellers are about to feel…

Get My Blueprint for the Triple-Stacked Summer Squeeze Scenario

The Big Picture

I’m sure you’ve heard of panic selling. Maybe you’ve even panic sold. Have you ever been in a stock and it dipped, and you freaked out and sold?

If that feels a little scary, wait until you get inside a short seller’s mind.

To me, very seldom is there ever true panic selling.

That’s because on the long side, even when a stock collapses, it usually doesn’t go all the way to zero.

Typically, when a stock tanks, it’ll drop real quick and then just kind of chop around. It might stay there for days, or weeks.

Do Stocks Ever Go To Zero?

I remember when MCI WordCom collapsed in 2002 and the stock bottomed at $0.06 per share from a high of $64.50 three years earlier.

Or when Enron bottomed in 2001 at $0.26 per share after trading at $90.75 in 2000.

So, these things happen. But it’s maybe once in a decade.

But short squeezes?

Short Squeezes Happen Far More Regularly

I’d guess that before this summer, it was an average of three to four times per week.

Short sellers know that, but they continue to believe it’s a viable strategy. The problem is, when a stock starts rapidly going higher, short sellers risk absolute disaster.

Why?

To short sell stocks you have to have a margin account. I’ve talked about this many times before. With a margin account you are borrowing money from your broker. Remember, margin goes both ways. It increases your gains AND your losses.

Now, if you’re trading with margin on the long side, and an extreme black swan event happens and the stock goes to zero, you still limit your losses.

For what it’s worth, I would beg all new traders to be very careful with margin. Avoid it until you know what you’re doing. Still, if you’re long there’s a stop. There’s a point when that stock can’t go any lower.

Safety Does Not Exist On the Short Side

Imagine shorting a stock in the $2s, only for it to go to $4. That’s a 100% loss. It’s the same as going long at $2 and it goes to zero.

But we have seen stocks like SmartBird, Inc (NASDAQ: BIRD) gap from $2.49 to $6.82, drawing in short sellers like flies to honey.

At the same time, longs got interested and drove prices higher. BIRD squeezed to $24+ in one day.

Stocks don’t move like that to the downside. And that is why shorts are so prone to panic.

I can tell you from experience, it’s a terrible feeling

My Take

This is already a target-rich environment. And there are opportunities every day. But there’s also a confluence about to happen in the market. This coming together of three specific factors could create a full-blow summer melt-up.

I can almost feel the short sellers’ fear and panic. My heart races even thinking about what they put themselves through.

Now, it’s also beautiful for those of us who are long-biased. My friend, this is a perfect time to be able to recognize short squeezes so you can ride the coming wave.

Watchlist

I remember trading SUNation Energy Inc. (NASDAQ: SUNE) what seems like forever ago. It’s a many-time former runner.

Now, if you look at the long-term chart, it’s a disaster:

Keep in mind that it never traded at $14 million. That’s all reverse splits pushing the price higher.

The last thing you want to do is invest in this thing. That said, SUNE is a day-tradeable stock:

As always, the tickers change but the patterns stay the same. SUNE could be setting up for a Day-Three Surge today.

On My Radar

• Oil risk is still on because the Strait of Hormuz is at a standstill
• Is everything an AI trade?
• Turns out that despite the doom and gloom crowd, the world still wants chips