This Market Rally Is About to End

by Andrew Zatlin

The market is handing us another golden opportunity to make money.

But perhaps not the way you think.

Let me explain what I mean, and show you how to get positioned for profits.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

This Market Rally Is About to End

A funny thing is happening right now:

Companies are delivering bad news… yet the stock market is rallying.

Among the companies that have already reported their quarterly earnings, only sixty percent have beaten their estimates. The typical number is about eighty percent.

And only a measly two percent of companies actually beat their earnings estimates. Typically, that number is closer to ten percent.

In other words, companies are struggling — making it all the more confusing that the market is going up.

Let me show you what I mean, explain what’s going on, and explain how to get positioned to profit from it.

Bad News Equals Rising Stock Prices?

For example:

  • Netflix (Nasdaq: NFLX) lost a million subscribers in Q2, yet its stock jumped ten percent.
  • Delta Air Lines (NYSE: DAL) missed its earnings projection by seventeen percent, yet its stock is up double-digits.
  • And earnings of Micron Technology (Nasdaq: MU) are trending down, yet its stock popped five percent recently.

What the heck is going on? It’s simple…

This is a Classic “Short Squeeze”

The market’s experiencing what’s called a short squeeze. Let me explain what that means…

There are always investors out there betting against the market. One way to bet against the market is to short stock.

Shorting stock means borrowing shares today, selling them, and then aiming to buy them back later at a lower price. Once they buy them back, they can return them, and hopefully make a big profit.

Sometimes, though, this strategy fails. Sometimes these short-sellers are forced to buy back shares at higher prices.

And that leads to a short squeeze — where stock prices start rallying.

Three Indicators that Signal a Short Squeeze

There are a few key signs that a short squeeze is happening:

First, a rally happens market-wide — not just with one specific company or sector.

Second, the number of buyers for a stock suddenly shifts — suddenly there are more buyers than sellers.

And third, there’s a rapid surge in price. That’s due to panic-buying.

Bottom line: a short squeeze can cause a rally, but one that’s untethered to good news.

And here’s the thing…

A Market Drop Is Coming

Morgan Stanley tracks short interest. Here’s what the chart looked like over the last two years:

Pay attention to the peaks and valleys.

When short interest peaks, that means there’s maximum negativity in the stock market. When it valleys, there’s maximum positivity.

Interestingly, this correlates to the performance of the stock market. As interest in shorting stocks goes down, the market rallies. And as short interest goes up, the market sags.

Right now, we’re in a downward trajectory for short interest — in just the past two weeks, the volume of short-selling is down eight percent — and that’s creating the recent rally.

But whenever a rally is “short-squeeze induced,” that means it’s sudden, it’s rapid — and it always reverses course.

How to “Squeeze” the Most out of This Situation

Bottom line: this short squeeze is almost over. And the market’s about to take another dive.

With that in mind, here are a few actions you can take to get positioned to profit:

First, this might be a good time to sell positions you don’t love. Sell into the strength.

Second, you can buy put options so you can bet against the market.

Or third, you could join my premium service, Moneyball Crash Alert. That way, you’ll know exactly what to do, and exactly when to cash out for the biggest potential profits.

To learn more, click here »

We’re in it to win it. Zatlin out.

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In it to win it,
Andrew Zatlin
Andrew Zatlin
Moneyball Economics