How Data Helps Us Bet Against Wall Street – And Win
Pop quiz: What do GameStop (GME) and Nvidia (NVDA) have in common?
Not much, is the short answer. Nvidia is one of the most cutting-edge, well-run companies around – while GameStop’s fundamentals are famously awful.
But – just as famously – GameStop taught the world how powerful a “short squeeze” can be to take share prices to the moon, as meme traders like to say.
Now, Nvidia recently reminded investors that short squeezes happen all the time – and not just to meme stocks. When Nvidia delivered its “guidance for the ages” and shares suddenly surged 25%, it cost the NVDA bears $2.3 billion on May 25 alone.
If you’re not familiar with a short squeeze, here’s a quick explanation. Short-sellers borrow shares from their broker and sell them, hoping to buy them back at a lower price and return them to the broker. But if shares rocket higher, shorts scramble to “cover” by buying the shares back, which simply adds to the momentum.
So, if you can detect a squeeze forming BEFORE the bears are forced to cover… before that rocket ship takes off… that’s how you can get in on some of the best stock plays the market has to offer.
I talk a lot here in Power Trends about Big Money piling in to buy stocks. So, today I want to highlight this lesser known strategy – one that I’ve also incorporated into my selection process.
Short Interest is one of the 29 predictive factors of highly successful stocks in my Quantum Edge system…
And, honestly, it’s one of my personal favorites. Because it’s about beating Wall Street at its own game.
See, when a lot of people hear there’s a ton of Short Interest (positions) in a stock… they’ll rightly conclude that the “smart money” is betting against that stock. Understandably, they’ll then steer clear.
But heavily shorted stocks can actually be very bullish, if you know how to read the data.
Two Situations Where I Love to See High Short Interest
When does heavy shorting become a “short squeeze”?
When the stock gets good news that catches the whole Street off guard – all the analysts are lined up the wrong way – and the price rockets higher, instead.
So, the first situation where high short interest can be a positive signal is when the company’s fundamentals are strong.
This is the Nvidia scenario. And it also happened with other chipmakers like Advanced Micro Devices (AMD), which quickly became the biggest winner in my Quantum Edge Trader portfolio since inception in March.
See all the green bars in mid- to late May in my chart below? That’s Big Money buying AMD, and a lot of that appears to be forced buying, to cover short positions:
The same thing played out with Microsoft (MSFT), too.
In fact, what investors might not realize is: Bears target great companies all the time.
Wall Street traders want to short stocks that have gone up a lot. When prices, enthusiasm and support are at all-time highs, they’ll come in and short-sell, hoping that prices will revert to the mean and the stock will fall back down to where it “belongs.”
This kind of play just doesn’t work with a stock that’s already in the basement. So, while it may sound counterintuitive, bears probably shouldn’t be doing this with companies that have poor sales and earnings, even no profits.
Just look at GameStop in 2020 and 2021. GME shares had already gone from $10 to $1…and stayed there for over a year. There wasn’t all that much further for it to fall.
Bears were just getting greedy at that point. And for them to go after a brand that’s so beloved among 20- and 30-somethings… it’s no wonder GME shorts fell victim to Reddit’s “WallStreetBets” traders.
Which brings me to the OTHER situation where I love to see shorts piling in…
A stock like Tesla (TSLA), where the company and its controversial CEO know how to generate a recurring stream of hype that’s good for the share price.
Just when you think Tesla is fizzling out, they’ll release a shiny new feature, take preorders for a whole new concept car, or Elon Musk will simply tweet something that grabs all the headlines and gets everyone excited again.
So, when you run that type of stock through my Quantum Edge system, you can see when the pros are about to be thrown off-balance.
Like in February 2020. Matt Maley, the chief market strategist at Miller Tabak, was on CNBC saying TSLA “is going to get absolutely clobbered.”
Jim Chanos, the short-seller who famously came out against Enron before anyone else, told The Wall Street Journal that he would not stop shorting Tesla EVER.
Steve Eisman, one of The Big Short guys, was shorting TSLA, too. These are legendary investors who were all confident that TSLA was going to be another big bust on their list of bragging rights.
But on January 3, 2020, my Quantum Edge system saw the data lining up against the bears.
It signaled us against the conventional wisdom and lit up green for TSLA.
And it was proven right when Tesla then ripped 684% higher.
This is why I don’t approach the markets like everyone else. I don’t think like everyone else.
Does Tesla “deserve” for its stock to fall when its “Full Self Driving” mode still doesn’t live up to its name… or when the company turns in profits not from selling cars – but from tax credits?
Maybe.
But I’m not about what’s deserved. I’m about what is, and my 29 predictive factors don’t lie.
When they add up in a stock’s favor, I’m willing to tell you: David Einhorn might be short 10 million shares of this… but my data says he’s wrong.
Bottom line: You can’t let what some short-seller is saying in the newspaper or on TV affect your perception of the stock.
Why do bears talk to the newspapers in the first place? Because they need to spread the gospel about how the stock is destined to fall.
They don’t start slamming a stock on TV before they short it. They do it when they’ve already sold it short – and they can’t have the stock go up. They have an agenda. And that’s what you’ve got to keep in mind before taking their “advice.”
Do what I do… and what I’ll continue to recommend here in Power Trends and in my stock services:
Base your decisions on numbers and data. That’s how you beat Wall Street at their own game. How you can turn, say, $5,000 into $39,000, which would have been your outcome with Tesla on my system’s signal.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
P.S. Back when I was on Wall Street, I saw how easy it was for the rich to get richer… and how impossible it was for the little guy to keep up.
The average Main Street trader loses about 90% of the time.
With the new developments in AI, it’s clear to me anyone who doesn’t get on the right side of the Data Divide is going to get left behind.
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