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The U.S. Stock Market Is Becoming One Giant Short Squeeze

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I've never understood the attraction to short selling, especially in a secular bull market. I get it - March and April didn't really feel like a big time bull market. But it was still part of one. March represented a cyclical bear market in a massive secular bull market. I've shown this chart many times, but if you're new to my articles and my work, then check this out:

The blue directional arrows represent secular, or long-term, bull markets. The red-shaded areas, on the other hand, are secular bear markets. There's no doubt in my mind that we are currently in a secular bull market. Throw what you want at this stock market, but it likely won't stick. In the past 2-3 years alone, a trade war with China, an incompetent Fed and now a 100-year pandemic have done nothing to deter this bull market. On Friday, the NASDAQ 100 ($NDX) closed at an all-time high:

Let this chart sink in for a moment.

All-time highs likely seemed preposterous just three months ago, but here we are. The Dow Jones lagged behind the NDX rather badly throughout March and April, but this index of conglomerates has turned the corner and is picking up steam. Over the past eight trading sessions, the Dow Jones has negotiated key psychological levels at 25,000, 26,000 and 27,000. I don't think 28,000 will be far behind.

So what's been driving the Dow Jones and the stock market in general? Well, a number of different companies have led the charge. Boeing (BA) gained over 40% last week, boosting the Dow Jones, but perhaps the biggest surprise of the week were the airlines ($DJUSAR). As a group, the DJUSAR rallied 35% last week alone. American Airlines (AAL) surged 77%. One reason for these crazy gains is the fact that short sellers had to begin covering their bets that prices would continue to slide. AAL, for instance, had a short percentage of float totaling 37% as of May 15th. Short sellers sell borrowed shares in hopes for a further slide so they can buy back those borrowed shares cheaper... and return them. The problem, however, is that when prices rise, those on the short side begin to feel the emotional pain of holding short positions with unlimited upside risk. The only way to end that pain is to cover their position (buy), sending shares even higher.

I've developed a "Short Squeeze ChartList" comprised of 144 stocks with very high short interest. Last week's gains among stocks on this list were astronomical. One energy stock, Valaris (VAL), rose 162% on Friday alone. Another beaten-down energy stock, Whiting Petroleum (WLL), jumped 62% on Friday. Roughly half of the stocks on this ChartList gained at least 10% last week, which underscores the role that short sellers are now playing in the stock market's continuing rally.

If you're at least an Extra member at StockCharts.com and an EarningsBeats.com member, including a fully refundable $7 30-day trial member, you can download this ChartList into your StockCharts.com account from our website in literally 5-10 seconds and be armed with a powerful resource for next week.

I am so looking forward to the balance of 2020 and beyond as we continue our secular bull market journey!


Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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