Imagine that at the end of 2022 you decide to take a month off from the stock market.
Enough of the frustration that bear markets always bring. I vowed to reassess market conditions at the end of January and just wanted to clear my head.
Now that we’re a few days into February, we can see how stocks fared during the January hiatus.
And you are humiliated.
Carnival (CCL) rose 34% in January…
Real estate platform Zillow (Z) is up 38%…
Tesla (TSLA) Makes A U-Turn And Is Up 40%…
Peloton (PTON) has found a leg and is up 63% (!)…
Wayfair (W) is up 84%…
And oh my god, Carvana (CVNA) stock was absolutely dumped by everyone at the end of the year… It’s up 115% in January alone.
So now you are thinking…
“It was the worst decision I ever made. Everyone made money last month and so did I.” none.”
“A rise like this must mean the bull market started without me.”
“I have to go in… favorite, today …or I’m going to miss out!
I don’t blame you for thinking this way. But as far as I can see, you would be wrong.
Look, we’ve looked at the 35 best performing stocks in January.
They generated an average of 50% profit, ranging from 33% to 115%. Impressive, no doubt.
The problem is that they all share one common denominator. January’s top performers were among the stock groups that achieved absolute value terrible 2022.
Carnival (CCL) may have risen 34% in January, but that’s after falling 60% in 2022.
Zillow (Z) jumped 38% in January… down 50% last year.
Tesla (TSLA) stock rose 40% in January… after falling 65% $670 billion Last year’s market capitalization!
Peloton (PTON) is down a whopping 78% in 2022.
Wayfair (W) is down 83% last year.
Of course, Carvana (CVNA) has lost 98% of its value in 2022.
With all that in mind, I hope to offer some important insights as you start thinking about what to expect (and do) over the next 11 months…
It’s a “fake out” rally
plainly, These gatherings no Be trusted.
If you think you should buy Tesla (TSLA) stock just because it rose 40% in January…
Or if you need to buy Carvana (CVNA) after its 115% surge…
You are much more likely to be a “sucker” for these moves than a benefactor.
To begin with, here’s a simple explanation for how the attractive rally in the market’s “worst” stocks happens…
It’s called “short covering”.
Please let me explain…
If someone feels that the stock price is unfairly and unsustainably too high, they can make a trade to profit if the stock price falls.
This is called “short selling” the stock.
To do this, you must complete the following steps:
- You don’t own the stock, so ask your broker to “borrow” the stock.
- Sell the borrowed shares on the open market. Because I feel the price is “too expensive”.
- Wait for the stock price to drop.
- Buy back shares on the open market and pocket the profits.
- Return those shares to the broker who lent them to you.
(This may sound a bit complicated, but don’t worry — I personally know a much easier and better way to bet on a company’s stock going down. Stay tuned for more details next week. )
there is tons They are often very large and sophisticated hedge funds that “short-sell” a company’s stock in hopes of making a big profit in the event of bankruptcy.
Of the five short selling steps outlined above, you only need to understand one. short sale Must buy stocks of stocks to close their trade.
So when a lot of people accumulate large “short” positions in stocks like Carvana…
Or in a stock that for some reason traded to a 1,103x earnings nosebleed valuation, as Tesla stock did recently (crazy!)…
And then the stock price falls, giving these short sellers huge “opening price” profits…
To lock in those profits… I need to start short selling buy number of shares.
Again, they’re buying stocks not because they think they’re good long-term investments… nor because they think a new bull market is underway. is not.
they just bought shares close Their profitable short positions.
Of course, in this scenario, the stock price will go up for some time. As each short seller sees the price of the stock gradually rise, he will be more than happy to buy back his short position at higher and higher prices so as not to lose his profit.
This creates what is called a “short cover rally”. Because this rally is driven by short sellers covering (aka closing) positions. Not by “real” bullish long-term investors.
‘Super Bull’ energy stocks, and this stock has potential 10x over the next 100 days.
So this is the first mechanism that can create a strong-looking short-term rally in a previously crashing stock.
It’s not a bullish signal…it’s bearish One is that the “real” buyers are not really involved.
What you should expect (and do) 2023
At this point, I hope I can at least open your eyes to the role shorting can play in the market and why the January rally is not to be trusted.
But my job here is not to leave you with any worries or doubts.my job is to help you know what to do do of Any Monitor market conditions even when the exact timing of the market’s next major trend is not clear.
(Psst, Rarely — Investing is an attempt at decision making Under uncertainty.)
To be clear, I’m definitely not a “permanent bear”.
I am a cautious optimist and have helped thousands of my readers achieve great success on the bull side of the market.
I call myself a “realist”. And sometimes, that means taking opportunistic trades on fundamentally flawed stocks, or, more simply, stocks that are vastly overvalued and will almost certainly bounce back.
For example last year, in my case Maximum Profit Alert service…
- 9 of 11 closing trades strong The position is profitable and…
- 9 of 9 closing trades bearish (aka “short”) positions were profitable.
Again, I mentioned earlier how to use the method of “shorting” stocks, which is much easier and safer than the five steps above. And last year alone, we were able to secure profits of between 69% and 182%. to decline With my system and stock prices that I have deemed unfairly and unsustainably “too high.”
This year, we plan to take the same “balanced” approach between bullish and bearish opportunities.
I know there are plenty of opportunities to make big gains on the long side of the right stocks, as is most of the time.
And after seeing the kind of stocks that rose in January…I have a battle plan to help my subscribers profit from a “long term down” bear market. The most vulnerable stock.
That battle plan involves something similar to what short sellers do, but without the risk of short selling.
Next week, I’ll talk a little bit more about my top targets.
Controversial to say the least. You’ve definitely heard of it before and it’s almost certainly exposed in your portfolio, and this just so happens to be one of the many “fake rallies” he’s seen in January .
Until next week, be careful not to chase after a weak stock rally in 2022. I don’t see any major changes in fundamentals. There’s a reason these stocks are falling.
nice to meet you,
Adam OdellChief Investment Strategist, money and market
PS We have a class of stocks that did very well in 2022…and for good reason…
oil and energy stocks.
I believe the sector is ready once-in-a-lifetime super bull It will raise oil prices more than anyone thinks.
Prices are now below local highs. Still, I remain convinced that the sector’s bull market is just getting started.
More — including how to learn my top oil picks — Here.
This quote comes from Daniel Drew, a notorious swordsman who was active in the early days of Wall Street.
I was thinking about these words while reading Adam’s article today…
Adam isn’t the only one who’s noticed a rise in garbage stocks. I’ve watched the rally in Carvana…and it alternates between fun and disgust.
It’s interesting to see a company with no viable business model or path to profitability triple in value in a month. But when you think about inexperienced investors, you’re likely to get burned when the stock hits the ground, and it’s not that fun anymore.
Adam delved into the mechanics of short selling and that all shares that are sold short are shares that must eventually be bought back. A short cover rally can turn into a legitimate short squeeze if it gets extreme enough.
You are familiar with panic selling. During market panic, buyers evaporate and sellers stumble trying to get out the door first.
Well, with a short squeeze it’s the same scenario in reverse. Sellers evaporate and turn into compulsory buyers, stumbling over each other trying to buy shares first.
If you own a stock that is performing poorly, you don’t have to sell it. You have the flexibility to hold on to it and wait for a better price, if that makes sense.
But shortsellers don’t have that option. Short selling requires margin and has theoretically unlimited downsides. Brokers simply don’t allow waiting either. You will face margin calls. The options are either to raise more cash to cover the losses or to buy stocks in haste to settle the short sale.
we have a little experience with this…
While working closely with Adam in 2021, Fortune in the Green ZoneSo, I recommended the stock of National Beverage (FIZZ), the manufacturer of the sparkling water brand “La Croix”. Among the reasons for choosing stocks was the extremely high short interest rate. At the time, National Beverage was largely hated on Wall Street.
Well… done! It was right before an epic short squeeze at GameStop (GME). Our position in National Beverage has skyrocketed by over 100% in less than a month.
i love this And on Monday, I plan to chat with Adam and the gang. Banyan Edge Podcast About the short sale…short squeeze…and what exactly is going on with the Carvana stock dumpster fire!