Quite simply put, the year past has not been normal!
Whatever normal is of course; there have been some incredible global market impacts from the ongoing Covid Catastrophe. The collapse of oil prices below zero was intriguing, that is it costs more to sell the commodity than to buy it. Then there was one of the biggest market routs in history followed by investors scrabbling to switch value into safe assets, and those safe assets happen to be tech stocks, okay that's not normal.
Meanwhile, Junk-Bond Yields disintegrated, Helicopter Money was dropped on everything, the markets, main street, handed out to people with food stamps, the FED joined in by purchasing corporate assets directly, who would have thought ... it's been crazy.
Perhaps one of the most intriguing and significant developments of it all is the Rise of the Vox Populi Sophisticated Retail Investor, bored with lockdowns they did more than dabble; they excelled at scavenging the market for opportunities. Facilitated through companies like Robinhood, they have armed themselves with the same instruments of trade used by hedge funds to deploy contrarian investment strategies only entertained by few ... just that it's not a few, there are so many of them that they have become a lethal force to be reckoned with, and they are good at what they do.
Retail Traders are setting up serious trading stations (The Battle Station at home)
In this two-part blog posting, we're going to look into how Shorting works, The Short Squeeze Strategy and a deep dive on why GameStop Short Squeeze Battles happen in the first place.
Short Squeeze Strategy
To understand the Short Squeeze, you need to have insight into what Shorting is all about, so we'll start our discussion there. In reality, Short Selling is very straightforward;
[1] You scan the market for overpriced assets often reviewing an asset's fundamentals.
[2] Borrow overpriced stocks from someone and sell those stocks on the market at the current high price.
BEFORE
[3] Buying the stocks back after the price as has fallen for a profit (sell something high and buy it back low to profit). Alternatively, you could take a position on a naked put to simplify the trade and pass on the task of all this stock borrowing to the market maker.
Nonetheless, Shorters make money when stock prices they have an interest in fall, and they become an important part of the equities ecosystem by cleaning out assets that are overpriced.
Let's take a look at an example, say Tesla. Everyone keeps going on about Tesla being in a bubble, but what does the Shorter Community think about all of this?
We have Price to Earnings Ratios in the 1600 space, pretty average financials BUT this huge potential all the same. If Tesla fulfills its corporate objectives, those investors who own stock now will be rewarded. However, there is a possibility that Tesla will undershoot such expectations and the shorters have started to arrive (see Short Float & Short Ratio) on the scene to profit from that potential eventuality.
So where does the Short Squeeze come in I hear you ask?
Well to be clear, not straight away. As short interest enters a stock, the price tends to drop as you would expect, and mainstream investors react by buying the dip to prop it back up. As this battle rages on between investors and shorters, the stock will start to display its under attack through its distressed volume price / volatility compression signal. It's this screaming distress signal that raises the alarm to Squeezers, and once they arrive on the scene, they will support investors to defend the asset price under siege using a set of long and spread position tactics.
Short Squeeze Algorithm & PlayBook
The Short Squeeze trade opportunity can be discovered mathematically through an analytic calculator that generates continuous intel for the Squeeze Trader about how their opportunities are developing.
The TTM Squeeze Volatility and Momentum Indicator was recently codified in a mainstream way by the legend investor John Carter, and it generates a visual indicator report that confirms whether the Squeeze Trader is positioned in a suitable Squeeze Zone of Opportunity or not.
The Squeezer normally enters long positions through 50 Delta 14 DTE Call Options to counterbalance the Shorter's borrowed asset, and in doing so, the tug of war begins between the Shorters, the Squeezers and the Market Makers.
As Shorters and Squeezers fight over the asset, they drive up volatility lifting the noise ratio on the stock, and this noise will eventually announce to the Squeeze community at large that a Short Squeeze Battle has begun somewhere in the universe of equities. New Squeezers algorithmically scanning the market will join forces with those already engaged and subsequently attempt to eject Shorters off their positions — In effect, the hunter becomes the hunted.
The net outcome of this unified and collaborative Squeezer Pack effort is highly profitable, and when the Shorters can no longer weather further losses on their p&l from rising Squeezer curiosity, they reverse themselves out of the game by covering their position and the asset price will pop as a consequence.
Retail Raiders Publish Code Blocks to help the Squeezer Cohort of the Trader Community
One of the things that amazes me is how developed, hooked up, sophisticated and advanced these Retail Raiders have become and so quickly. The days when the Global Financial Crisis saw fund managers cheat the average investor through a mirror of watermarks and derivatives are long gone. The investment community today, like the political landscape today, is highly polarized. Retail Raiders are disrupting the status quo of markets through Do It Themselves tactics, tinkering with Advanced Risk Models that quite frankly would shock some of those authoring university papers on the very same subjects.
Are these Squeezers a pest? ... Not for governments trying to drive up asset prices to support a fragile market ravished by Covid-19. However, should the Squeezer Community continue to grow in such numbers, they may become difficult to control, and they are likely to become an unbalanced force that the market will eventually need to reconcile. It's fair to say Active Management is back on, and it's no longer under the authority of the average Wealth Management Unit — change is on the horizon, and we'll talk about all of this in another posting.
In part II of this posting, we'll explore the Tactical Battle Ground over GameStop.
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