Tuesday, August 20, 2019

This Is A Short Squeeze

When stocks power ahead, especially after a severe downturn (such as last week's), there is normally a good amount of short squeezing going on, as individuals who borrow stock in an attempt to unload it at a lower price, thus raking in the difference (short sellers), are forced to cover (buy at a higher price than they anticipated).

The amount of money that short sellers can lose in conditions like this are unlimited, so there's a strong urge to limit losses. It's all very sophisticated, this short selling and short-squeezing, generally the province of high frequency traders at dealer hubs. Neither practice is recommended for the average 401K investor.

When short-squeezes occur, they are usually one-day events, after which the markets return to some semblance of normalcy, though "normal" is a highly suggestive description under current market conditions. Individual stocks and whole indices are being whipsawed daily by the cross-currents of currency devaluation, trade war rumors, economic data, and yes, even the occasional quarterly corporate report.

Thus, traders and analysts are well-advised to do some smoothing out of all the noise in the markets, focusing on moving averages and daily ranges, rather than final prices. In that regard, the major US indices are between their 50 and 200-day moving averages, which implies plenty of volatility, setting up both buying and selling opportunities over the near term for those with high risk tolerance (hint: probably not you).

Day-traders, otherwise known as major broker-dealers, will have a field day in such an environment, though history is rife with examples of traders being spectacularly wrong and losing billions in the process. That's likely to happen in the current environment, if only because people never, ever, ever learn from the mistakes of others.

Expect more volatility, with a tiny edge to upside trading, though different sectors and different stocks will move in different directions.

Choose wisely.

At the Close, Monday, August 19, 2019:
Dow Jones Industrial Average: 26,135.79, +249.78 (+0.96%)
NASDAQ: 8,002.81, +106.82 (+1.35%)
S&P 500: 2,923.65, +34.97 (+1.21%)
NYSEComposite: 12,687.91, +107.50 (+0.85%)

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