So, I learned something today. And I’d like you to check this out. As you know, I track institutional capital flows and bring everything down to one simple metric. Is momentum positive, neutral, or red? Well, on Wednesday afternoon, the markets had an absolute whipsaw reaction.
The bottom was called right as Fed Chair Jerome Powell talked. Momentum swung from a deeply red, negative territory and into a MONSTER inflow of capital. The markets cheered Powell’s statement around interest rates, the low odds of a recession, and the central bank’s approach to supporting the economy and taming inflation.
While this was happening, I noticed something significant. I noticed something very profitable. I noticed that the most beaten-down stocks of the market – the most heavily shorted stocks out there, had a dramatic turnaround. The thing about these companies… not too many people like them.
Where Short Interest Sits
Let’s talk about short interest and companies shorting stocks… Remember, for institutions to short a stock they must borrow the stock and sell the stock short on the market. If the stock falls they can then purchase the stock back at a lower amount. They then return the stock to the lender.
Well, here are the stocks with the highest level of short interest. My signal turned positive not long after 2:35 pm in one of the most dramatic inflows of capital that I’ve seen. You’ll see the value of the stocks when the signal switches from negative to positive. Then you’ll see the closing price for the stock today at 4 pm.
|Ticker||Company||Short Interest||Wednesday 2:35 PM||Friday Closing Price||Return|
|BGFV||Big 5 Sporting Goods Corp||40.09%||$15.67||$17.08||8.9%|
|SDC||Smile Direct Club||33.95%||$2.26||$2.84||25.6%|
These are incredible returns for three days of trading. To be honest, I never put this together. But I’ve been going back through signal switches, and I see very similar results.
Momentum matters. Price matters. Capital inflows matter. These are dramatic returns in a 50-hour period. I’ll continue to strengthen these signals – and if all goes well, you can effectively trade less than 10 days per year and easily beat the overall annual performance of the market.
What’s On Tap Next Week?
Now that Quad Witching is behind us, we’ll be looking for volatility to drop over the week ahead. However, there’s still a lot of weakness in this market. And investors have to be very careful with Russia still threatening Europe and energy prices set for a continued climb into the months ahead.
I also stress the challenges in the global supply chains. We have a stealth rise of COVID cases across the U.S., Europe, and Asia. Russia has pulled the pandemic narrative off the front pages, but COVID remains a formidable challenge in the weeks ahead. I have contacts in Europe and New York who are out sick again. Germany had a big jump in cases, and China might start shutting down ports again.
That’s why I’m watching Nike’s earnings report on Monday. No company knows the supply chains and export markets of Asia better than this company. We’re looking at insight into their freight movement, rising inflation, its ability to manage supply chains in tight markets, and questions about consumer income in an inflationary environment. The headlines are behind us… but there could be more fireworks ahead.