Is This The Greatest Market For Short Sellers Ever?
Yes, this is the greatest market for short sellers ever. To be clear, that doesn’t mean the overall market is going to fall by the most ever. Shorting the overall market is generally a hedge. Short sellers find bad companies that are valued too highly. In that case, this is the best market for shorts because there are so many expensive stocks. Furthermore, there aren’t many short sellers left.
As you can see from the chart below, the median S&P 500 stock’s short interest as a percentage of its market cap is the lowest since at least 2004. That’s the 2nd most important reason why this is such a great market for new shorts. It’s important to have a low short interest.
Borrowing costs get high when there are a lot of shorts. Plus, less shorts means fewer short squeezes. Finally, sentiment among short sellers is despair. We’ve all seen Tesla short sellers give up and apologize. That’s the time to start your trade.
When the market rises, the short percentage falls because some cover and the market cap is bigger. Of course, this chart just shows the stocks in the S&P 500. Many smaller stocks have high short interests. Worst companies have the highest interests. Monday was a great day for the worst businesses. GameStop was up 9.4%. It’s up 120% year to date. This business is on life support which is exactly what does well in this environment.
Transocean was up 30.4% which put it up 169% for the month. This company can’t make a profit unless oil gets to $70 and stays there for a few quarters. It’s only at $43.6. It's likely that $70 oil is a possibility next year. That would probably cause it to rise even more even if the business never actually makes a profit. It’s a call option on oil. Monday’s rally was mostly about the worst stocks rallying though. It has been a good year for bad businesses.
Who Is Funding The Rally?
People always ask who is buying stocks that go to valuations that make no sense. Momentum investors are always willing to buy stocks that go up even if there is no real business. It works until the trade becomes too popular and collapses under its own weight. Traders start taking profits and then the momentum shifts which ruins the whole reason many were buying.
As you can see from the chart above, individual traders are driving this rally. Yearly growth in Schwab + TD Ameritrade accounts went from the mid-single digits to 20% this year. It’s interesting because some claimed there was froth last year because there were Reddit groups.
Just because they existed, didn’t mean there was a bubble. If traders would have seen what the market would look like a year later, they wouldn’t have called late 2019 and early 2020 a bubble. It was an overbought market, but there wasn’t mania like there is today.
Our Friend, The EV Bubble
EV bubble has gotten so big, practically everyone is talking about it. This bubble is quite close to its end. A best guess is it ends in January, but it might not even make it to the end of the year. Mania in EV stocks mimics that of blockchain stocks except the bubble is way bigger in terms of market cap.
In a list of 22 blockchain stocks, the average gain in the 2 months leading up to the bubble peak was 165% and the median gain was 126%. Ironically, bitcoin is back near its record high. Even some pot stocks are up as Cronos is up 39% month to date.
As you can see from the table above, the average EV stock in the past 2 months is up 143% and the median stock is up 162%. There are a lot of green/sustainable investors trying to bet on something that doesn’t exist. Specifically, profits from EV stocks don’t exist. These firms are practically worthless. Even Tesla isn’t much of a business.
This list doesn’t include the many of the worst bubble stocks which are the fuel cell firms. Fuel cell technology is a few years behind electric technology which is pretty bad because EVs can’t exist without government help. Fuel cell trucks might not even exist.
Nikola is partially a fuel cell company and partially an EV company. It isn’t hyped as much now because its founder was ousted. One of the fastest risers is FuelCell Energy which was up 54.3% on Monday and is up 275% since September 24th. It would push the average up if it was added. Similarly, Plug Power was up 10.3% on Monday and is up 139% since September 24th.
Keep in mind, the worse the business, the better the stock rally. Plus, it helps to start out small. That’s why Arcimoto is up 191%. By the way, the stocks listed above are in market cap order. Nio continued its rampage. This stock is unlike anything most have ever seen. It rose 12.5% on Monday to a new record high. It’s up 2,237% since its March 23rd bottom.
Bigger Than 2000 Peak
This bubble in EV and SaaS stocks is the biggest in many decades. Most expensive stocks are too hot. As you can see from the chart below, the 2 year forward PE ratio of the 20% most expensive S&P 500 stocks is 35 which is a few points above the peak in the early 2000s. It will get even higher when Tesla is added to the index.
On the other hand, the cheapest 20% of stocks are at 11 times 2 year forward earnings which is about normal. Many of the cheap value stocks aren’t in this index anymore because their market caps are too low. Small banks are a huge part of the Russell 2000. That’s where the opportunity lies. Only opportunity in the software and EV stocks is to short them.