As someone who has traded through a couple verified stock market bubbles over the last 20 years, I can tell you that there are few single stock trade set ups as powerful as the short squeeze. And short squeezes are one of the pillars of a proper bubble. In the late 1990s, to get a squeeze going, all one needed was headlines as trivial as: a computer maker (trading at 100x earnings) putting an internet access button on their keyboards, or a bricks and mortar retailer announce the ability for consumers to buy goods on-the-line, or internet portals guiding to total addressable eyeballs in place of earnings, and bam! Shorts be screwed. Traders tripping all over each other to cover and then re-short, while long only investors bought the whole way up, fueling the fire.
While there are some who think the current equity market in the U.S. resembles bubbles past, I am not one of them. While there are pockets of exuberance, equity valuations as whole don’t seem particularly stretched given the backdrop of artificially low interest rates. It appears to me that there are as many mini-bubbles; 3D printing, internet services and energy that have popped, and refuse to rally, and mini-bubbles that still exist (small/mid cap biotech and social media). All in all, the risks seem balanced.
One stock that caught my eye yesterday (one that I happen to be long, read here), is Shake Shack (SHAK) which rallied 12%, making new all time highs, on NO news:
We have seen this movie before, low float, 36% short interest and options are not listed on the stock, oh and while valuation is silly, there is amazingly positive sentiment about the brand and the product, which we should know by now is a powerful cocktail in bull market that lacks liquidity. There was a time in my career when I had a large book of longs and shorts and this stock would have screened well as a fundamental short. At this time in my life that notion seems insane.
But, it is important to remember that even in this 7 year old bull market, sentiment can change on a dime. Remember GoPro (GPRO)? Look how similar GPRO traded to SHAK in its first 2 months since its June 2014 IPO:
Both stocks saw big gaps from their IPO price, consolidated those gains for weeks and then when short interest started to ramp, the stock broke out. Once GPRO broke the post IPO high of $50, the stock then doubled in a matter of weeks before topping out and round-tripping the entire move over the next 7 months:
Why try to pick a top when you’re skeptical on a darling? You have to be patient. Once a top is in, and sentiment has turned, then you press selloffs and sell rallies.