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A Big Short Squeeze Is Brewing for Stocks, and We’re Bullish

Source: GluckaPixels / Shutterstock
This has to be one of the most hated stock market rallies of all time. And the data says that’s actually a reason this could become one of the biggest rallies of all time, too!
Stocks are up big over t…

Source: GluckaPixels / Shutterstock

This has to be one of the most hated stock market rallies of all time. And the data says that’s actually a reason this could become one of the biggest rallies of all time, too!

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Stocks are up big over the past two months. In that stretch, the Dow Jones has climbed 14%. The S&P 500 has risen 17%, and the Nasdaq has surged 30%. The S&P even retook its 50% retracement level – meaning it’s recovered half of its bear market losses. Since World War II, the market has never retraced half its bear market losses and proceeded to make new lows.

Stocks always moved higher.

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A graph depicting the S&P 500's crossing of 50% retracement, indicating the end of the bear market

Yet, despite these huge rallies and very significant technical milestones, the bears aren’t relenting. In fact, they’re doubling down. Data shows that bearish bets against the S&P have risen as this market rally has heated up.

Ostensibly, the bears’ conviction might seem worrisome. But it’s not. In fact, if anything, it’s actually super bullish.

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Over the past 15 years, whenever the bears have doubled down against a market rally, they’ve been wrong. And the rally only got hotter.

Will history repeat? We think so.

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Bearish Bets Rise as Rally Heats Up

As stocks have risen sharply since mid-June, bets against this rally persisting have risen sharply, too.

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Net non-commercial S&P 500 e-mini positions were positive at the very start of this rally. That means more investors were placing bullish bets on the market than bearish bets at that time.

However, the net positions number has since collapsed to nearly negative 250,000. And that means bearish positioning now far outmatches bullish positioning (lots of investors are betting against the market).

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When you first read that, you might get scared. What do the bears know that the market isn’t seeing?

Well, they’re not seeing anything. They’re just doubling down on a bad bet.

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It’s rare for bears to double down on bearish bets as the market rallies, as is the case today. But every time it happens, the market ends up being right. The bears are forced to capitulate and cover their short positions, which leads to the rally’s acceleration.

Indeed, over the past 15 years, previous occurrences of this dynamic – rising bearish bets alongside rising stock prices – have consistently produced 20%-plus market melt-ups.

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A graph depicting the rise in bearish bets as stock prices rise over time

The implication? The bears may be doubling down. But history says that means this market rally will only heat up.

One thing we’ve learned through years of investing is that in the stock market, history tends to repeat often.

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We believe it’s about to happen again. Rising bearish beats concurrent to rising stock prices has historically produced massive market melt-ups. And we’re confident that we’re due for a similar market melt-up in 2022/23.

The Bullish Cycle Repeats

This dynamic happened before in late 2010. Stocks were rebounding after some pretty lame economic data in the summer, and investors didn’t believe in the rally. Bets against that rally accelerated. But those bearish bets actually led to the rally’s acceleration. And consequently, the stock market rallied big into mid-2011.

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It happened again in late 2011. The market was rallying big as it tried to recover from the fallout of the European Debt Crisis. Lots of investors didn’t believe in it. Bearish bets rose. But from late 2011 to mid-2013, the market surged 50% higher.

Then it happened in late 2015 and early 2016. The market was rebounding from an oil price collapse. Investors weren’t buying it. Bearish bets rose. Stocks proceeded to surge higher in 2016 and 2017.

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And, of course, it happened in early 2020. Stocks were on the rebound after the pandemic-induced market crash. Investors kept questioning the rally’s durability. Bearish bets rose. But stocks just keep powering higher. And the balance of 2020 into 2021 saw enormous stock market returns.

This happens time and time again. It’s a repeatable cycle.

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  • Stocks collapse after bad news.
  • They start to rebound once the news starts to fade.
  • Investors – still remembering the bad news – don’t fully believe in the rally and bet against stocks.
  • But the bad news keeps fading, and stocks keep rising.
  • Those shorts are forced to cover. The market rally kicks into a higher gear. Investors who buy the dip and stick with the rally make a ton of money.
  • That’s the cycle. We’re in between steps two and three right now. What comes next, then, is more stock market gains – and big profits for investors who stick with the rally!

    The Final Word

    The stock market bears are out in full force these days. Go on Twitter, and you’ll see them everywhere.

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    But don’t listen to them. Instead, focus on the market action and the fundamentals.

    Tech stocks are up about 30% from their June lows. And the S&P 500 crossed above a critical technical threshold – one with a perfect record of calling bear market endings. Just yesterday, even, stocks rallied when the news flow gave them every reason not to. (Housing data came in bad, and manufacturing data came in even worse.)

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    The market action is very bullish.

    Fundamentally, we’re seeing a ton of evidence that inflationary pressures are receding. That paves a path for a more friendly Fed in 2023. And typically, a friendlier Fed is the market’s strongest ally. See: Early 2020.

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    Indeed, the fundamentals are very bullish, too.

    Overall, then, we think the bulk of evidence suggests that – yet again – the bears are wrong. And this market rally is set to accelerate.

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    If so, we have the perfect stock for you to buy today.

    It’s a tiny, completely unheard-of EV stock. And it’s trading for less than $5 – with roughly 40X upside potential and a series of huge catalysts on the horizon in 2023.

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    If this market rally does accelerate, as most data suggests it will, then this is a stock you need to own today.

    Click here to learn more.

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    The post A Big Short Squeeze Is Brewing for Stocks, and We’re Bullish appeared first on InvestorPlace.

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