Transcript:
Tom Vaughan:
Hello, everybody, welcome to Tuesday, the S&P 500 had a green shirt day today up 2.8%
Kind of have some good news and some bad news, I’ll cover the bad news. First, it seems like this particular rally was a short squeeze. And so when you hear that, what they’re talking about is that people are shorting a stock. And so if I want to short a stock, I borrow it from a brokerage firm, let’s say at $10, I’d sell it at the open market that my $10 in hand, I’m hoping it’s gonna drop to something like $5. And I can take that and buy back my stock and give it back to the brokerage firm and I keep the difference, that’s my profit. Unfortunately, if it all of a sudden goes to $15. Now I’m kind of panicking, because I’ve just lost a bunch of money, I’m gonna have to pay 15 for something I sold for 10. And so I start buying it back. And this happens enough, and there’s a bunch of hedge funds out there, all of a sudden, the stock doesn’t, you know, starts going up, because everybody’s buying it goes to 70 and 8090 20, etc. And there’s an unlimited risk on the upside on the downside there because essentially, the stock can go to 100, and you paid 10, and you have to pay 100, to get it back to give it back to the brokerage firm. So that’s what they call a short squeeze.
And you can tell what happened today, if you look at what Bloomberg was talking about, which just simply if you look at the S&P 500, the most heavily shorted stocks were up five and a half percent. Now the S&P As I mentioned, was up 2.8. And the least heavily shorted stocks, let’s say on the Russell 3000, were only 3%. So really, you know, you can kind of tell what’s happened today, you have, you know, a lot of fund managers and hedge fund managers shorting very high short interest, lots of you know, money on the sidelines, they’re not buying stocks. And it doesn’t take much when the sentiment is so negative for a few positive situations that come through and start to drive it and then all of a sudden, everybody’s starting to cover the shorts, and it brings that market up substantially. And you’ll see these huge rallies. So very fascinating what happened today.
But here’s the good news. Many of the reversals that have happened in the market started off just exactly this way with high short interest and a short squeeze. And so what we’ve seen here is that, you know, we’re in a down market, right? There’s no doubt about that. And we’re down all year long. The S&P 500 is below the 200, day moving average, the 20, day moving average is moving down, the major trend is down. And we’ve had many of these little run ups, and they’ve all failed, this would be the fourth or fifth one, because those are the minor moves, and they move and they come back down and we will come back down at a new low. And so eventually, one of those minor moves will turn into a major move and reverse the entire trend of the market. And we’ll be back to kind of running forward with a major trend up instead of down. A lot of times short selling squeeze can start that, you know, I think probably tomorrow the market goes up to we hit exactly this very, you know, tip of this resistance, today is the third time probably going to break through it. There’s a lot more short interest out there if if the market gets rolling again. And you know, all of a sudden, we’re coming back up, there’s a kind of a gap before the next set of resistance. So you can see some motion coming here. And sometimes that eventually turns into kind of this fear of missing out retail investors start jumping in. And then finally the event, the institutional investors look at that and say, hey, you know, we got to get in there too, because we’re losing out to the indexes and what have you. I think the one thing that’s really holding the institutional investors back, though, is just the knowledge of what’s happening here.
We don’t have super low valuations. So it’s not the stocks aren’t real cheap, which they like to see in this type of a downturn. We don’t have a scenario where the Federal Reserve is on the stock market side, they’re very aggressively trying to fight inflation, which is tough for the stock market to deal with. And if anybody studies the 2000 downturn of 2008 downturn, there were lots of big, nice big runs before it fell further and further. And those ended up 45% Down to 57%. Down. So that’s, you know, in the recent enough memory that I think people are in those, these rolling downturns, you know, the last one we had was 2008, the one before that was 2000. We’ve had, you know, IV type downturns in 2018 2020, those are quite different. These are these rolling ones can have a lot of these big upturn. So I think that kind of keeps the institutions, you know, a little bit on sidelines, but you don’t know and so that’s kind of the good news, when you have these short covering rallies is it could turn things around and really get things going. So we’ll see how this plays out as far as that goes, but a good time to be an investor. Good time to be watching and seeing what’s happened. There’s a lot to learn here right now, and we’ll see what happens tomorrow. Thank you very much.