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Betting against the smartest investors in the world

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From Nick Rokke, Editor, Palm Beach Daily:

Short sellers smelled blood in the water…

In 2008, they had shorted 13% of Volkswagen (VW) shares… betting the stock would tank because it was too expensive. (At the time, VW traded at 19 times earnings—twice that of its competitors.)

Instead, shares soared 379%… in just two days. Short sellers got killed.

On October 26, 2008, Porsche announced that it had bought enough stock and options to control 74% of Volkswagen’s shares. That was good news for Volkswagen…

Another firm, Northern Saxony, held 20% of the company… It wasn’t selling. Passive index funds owned another 6%, and they couldn’t sell shares either.

Combined, they accounted for 100% of VW shares… So as soon as Porsche exercised its options, there would be no shares left for short sellers to buy to cover their positions.

Realizing this, short sellers panicked. They put in bids to buy shares no matter what the price so they could exit the trade.

VW shares soared from 210 euros ($326) to 1,005 ($1,250) over the next two days—a 379% gain. The price eventually fell… but not before short sellers got crushed.

Anyone who sold shares of VW on the way up made a killing.

Not all short squeezes go up that much, that fast. But smaller squeezes happen all the time…

Today, I’ll show you how to find and profit from these short squeezes.

The Short Squeeze

Playing short squeezes is risky—you’re betting against some of the smartest investors in the world. But sometimes even the smart guys are wrong.

Any good news can send heavily shorted stocks a lot higher… And potentially make you some quick gains.

You see, when you short a stock, you’re selling it without owning it. You borrow shares to sell the stock. And then hope the share price drops.

If the price does drop, you pocket the difference between the price at which you sold and the repurchase price.

But if a shorted stock rises too much in price, that can create a short squeeze. A short squeeze is when short sellers start closing out their positions to avoid massive losses. As they buy, they create upward pressure on the stock price.

That’s what happened to speculators who bet against Volkswagen.

I expect more scenarios like this to play out… not as large and drastic as the VW short squeeze… but we could see some 100% moves play out in a couple of months.

The economy is strong… Tax cuts are boosting profitability… And the country is at full employment.

So even a glimmer of good news can send hated stocks higher…

How to Play a Short Squeeze

The first step to finding a potential short-squeeze setup is to look for hated stocks.

You can tell if the market hates a stock by looking at the “short percentage” of its share float. This just shows the percentage of the outstanding shares speculators are shorting.

(To see if a specific company is heavily shorted, I recommend using Yahoo Finance to find the short percentage. When you look up a stock on the website, click the “statistics” tab, then look for “Short % of Float.”)

Generally, a short percentage over 10% means a stock is hated. A lot of smart, big money managers must be betting against it.

Lately, lots of hated companies have popped on good news. For example:

  • Tesla’s (TSLA) short percentage is 31%. Short sellers have lots of reasons to be bearish. But last month, CEO Elon Musk said once again that Tesla was on pace to reach its goal to produce 5,000 cars per month. It doesn’t matter that Musk is unlikely to reach his targets. The stock still jumped 20% in the past month.
  • Rent-A-Center (RCII) had a short percentage of 65%. However, the struggling lease-to-own business for appliances and electronics received a buyout offer from Vintage Capital earlier this month. The stock has soared 57% in two weeks.
  • Video game reseller GameStop (GME) had a short percentage of 43%. On June 19, the company confirmed rumors that it was in buyout talks with private equity firms. The stock zoomed 23% higher in three days as short sellers scrambled to cover their positions.

Again, playing short squeezes is risky. But as you can see, any good news can send a hated stock much higher…

Where to Look

If you want to research heavily short stocks, I recommend checking out MarketBeat’s list of largest short positions.

MarketBeat updates the list about once per month. That’s usually enough updating to find potential short-squeeze setups (short interest usually doesn’t change quickly).

To be clear, I don’t recommend buying a stock just because it has high short interest. That’s a losing strategy in the long run.

However, if you think a hated stock is about to get some good news, you can make a lot of money if you buy before short sellers have to cover their positions.

Regards,

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Nick

P.S. One market that’s getting hit by plenty of bad news is cryptocurrencies. However, there’s a lot of disinformation out there about this new asset class… And that’s led to a brutal sell-off in 2018. But once investors realize how much institutional money is headed into this space, we could see the market grow 10 times from where it is now.

The mainstream press has vastly underestimated just how badly the big financial players want to get into cryptocurrencies… We could see $5 trillion of institutional money headed into the market. You can learn more details on how to take advantage of this dip in the crypto market right here


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Gilead and Celgene’s stocks may have more room to run

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CNBC’s Jim Cramer was somewhat surprised to see the biotechnology sector bounce back in 2018 after months of weakness.

“At a time when President Trump keeps slamming the pharmaceutical industry over excessive drug pricing, … you might think that the biotech stocks should be getting slaughtered,” the “Mad Money” host said on Tuesday.

“But you know what? After spending a long time in the doghouse, biotech as a whole is actually having a pretty darned good year, with the Nasdaq Biotechnology ETF, the IBB, up 17 percent for 2018,” he continued.

To make sense of the biotech stocks’ new leadership role, Cramer brought in technician Bob Lang, the founder of ExplosiveOptions.net and part of TheStreet.com’s Trifecta Stocks newsletter team.

Lang, who uses technical tools to track the action in particular stocks, decided to look at the group’s most recent leaders and laggards, beginning with the daily chart of Gilead Sciences.

Since Gilead went out of style on Wall Street in 2015 for curing Hepatitis C — a feat that, somewhat ironically, investors figured would lead to less recurrent business for Gilead — its stock has been pummeled.

But Lang noted that in the last few months, particularly after Gilead’s $11.9 billion acquisition of cancer immunotherapy play Kite Therapeutics, its stock has been bouncing, logging higher highs and higher lows.

Gilead’s stock has managed to break through its 50- and 200-day moving averages as well as its former ceiling of resistance, and key momentum indicators like the Relative Strength Index have surged into positive territory, Lang said.

Better yet, Gilead’s moving average convergence-divergence indicator, which technicians use to predict changes in a stock’s trajectory, recently made a very bullish crossover, telling Lang that the stock could be prime for a rally.

“The stock is overbought right here and the next ceiling comes in at around $82, up $5 bucks from these levels, but given everything else he sees in the chart, Lang believes Gilead can keep climbing,” Cramer said. “In fact, it’s his favorite name in the group and he wouldn’t be surprised if it starts challenging its old highs of around $110 by the end of the year.”

Next, Lang turned to the daily chart of Celgene, a biopharmaceutical giant with a focus on treating cancer and inflammatory disorders.

Shares of Celgene are down 20 percent for 2018 because of concerns about its leading drug, Revlimid, and the rest of its pipeline. But, like Gilead, the stock has been making a comeback in recent weeks.

Lang started by inspecting Celgene’s Chaikin Money Flow, which measures levels of buying and selling pressure in a stock. Not long ago, this indicator turned green, indicating to Lang that institutional buyers were warming up to the stock. He added that the stock has made a “W” formation of late — another bullish signal.

“Right now, the stock’s at $86. [Lang] thinks it could make a move to the 200-day moving average, … currently around $97 bucks, in the coming weeks,” Cramer said. “He may be right given the recent rotation into biotech. Without the rotation, though, I’m less sanguine.”

Lang also threw a third name into the mix — Illumina, a biotech-oriented medical technology company that builds machines for DNA analysis with one of the best-performing big-cap health-care stocks since 2017.

“As far as Lang’s concerned, the chart is a thing of beauty,” Cramer said, noting the stock’s steady climb, “robust” Chaikin Money Flow and “insanely strong” moving average convergence-divergence indicator.

The only issue seemed to be that the stock was overbought, but that didn’t shake Cramer or Lang.

“This thing, though, has been overbought very frequently since 2017. Now, that has never been a reason to sell the stock,” the “Mad Money” host said. “Instead, you’ve done much better if you simply wait for the next pullback — and we get those all the time — and use that weakness to do some buying.”

Lang’s analysis echoed that point, recommending that investors use weakness in Illumina’s stock to buy and strength to sell.

“The biotechs and the biomed techs have finally started showing some signs of life and the charts, as interpreted by Bob Lang, suggest that Gilead, Celgene and Illumina have more room to run,” Cramer said. “My view? Look, if you believe the economy is going to stay strong, then maybe this rally does peter out, but you’ve got my blessing to put on some exposure on any one of these or all of them, as I think Lang is going to be dead right.”



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The greatest obstacle to investing success is… you

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From Richard Smith, Founder, TradeStops:

If you’re like the average investor, you’d say it’s easy to feel overwhelmed at times by confusion in the markets – and sometimes even by fear.

But why should it have to be this way?

Investing is a noble pursuit. Generating wealth for a comfortable retirement means creating the financial freedom to live well in the golden years… while providing support to loved ones… enjoying the finer things in life… and possibly making a real difference in the world.

Those are all good things. The pursuit of good things should not be a stressed-out experience! But for too many investors, that’s exactly what it is. Their market journey is a series of obstacles and worries.

There is bad news and good news here.

First the bad news: Your greatest obstacle to investing success is… you.

And the good news: The solution to overcoming your “greatest obstacle” is within reach.

What does that mean, to say the greatest obstacle to investing success is you?

It means that when it comes to investing successfully, finding great stocks is not the hardest thing. And dealing with volatility is not the hardest thing.

The hardest thing for any investor  and this includes everyone from Warren Buffett on down  is overcoming the natural pitfalls and challenges within their own brains.

Walt Kelly, the artist who drew “Pogo,” had a caption on his most famous cartoon that read: “We have met the enemy, and he is us.”

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That statement could have been tailor-made for investors. Your biggest challenge as an investor will be overcoming your natural behavioral shortfalls and biases  learning to do the right thing and overcoming your built-in bad behaviors in the process.

(And again, this isn’t just “you” specifically. It’s also true for me, and Warren Buffett, and everyone else.)

This really goes back to the essential mission of TradeStops. We want to help as many investors as possible find a path to comfortable retirement. (We’ve helped 25,000 so far, but that number should expand 1,000-fold.)

A key goal of TradeStops is to remove anxiety from the investment process, and in doing so, help investors rediscover the joy of investing as they build long-term wealth.

How do we do this? By combining science, technology, and proven principles of behavior modification.

To get rid of bad investing habits, you can’t conduct brain surgery on yourself (and you wouldn’t want someone else to try).

But you can use software as a tool in the investment decision-making process… which in turn serves as a form of painless behavior modification… which puts you on the path to anxiety-free investment success.

Again, this is what TradeStops is all about: Helping investors overcome their greatest obstacle to investing success… so they can meet their long-term wealth-building goals… and have a positive impact on everyone around them.

Here’s something else funny about the brain: Knowledge makes behavior modification easier.

The better and deeper the brain understands the “why” behind something, the easier it becomes to make a positive behavior change around that thing. And sometimes the “why” is even more important than the rules.

The importance of the “why” was once vividly demonstrated by Ed Seykota, a famous trend follower who made countless millions in the commodity futures markets.

Seykota was one of the earliest adopters of mechanical trend-following techniques. In the 1970s he was a pioneer in the use of exponential moving average crossover systems. (They were so new and exotic at the time, people called them “expedential” moving averages.)

At one point, Seykota decided to teach a classroom course on trend following. For the curious who signed up  remember, trend following was totally new at this point  Seykota spent something like 10 percent of the classroom time explaining the very simple rules of his trend-following system  and the other 90 percent explaining the “why” behind the importance of sticking with the rules!

We’ve realized a similar idea applies to TradeStops software.

No matter how good our software is  and you continue to give us rave reviews, for which we are deeply grateful – it feels like there is always more opportunity to help you, our customers and fellow investors, to get more out of TradeStopsby better understanding the “why” behind certain basic principles.

To that end, we are excited to start something new: An “education series” of editorials, designed to help you become a better investor by sharing the “why” behind some very important concepts.

Our game plan with the education series is to start with the following concepts, exploring each one over a period of weeks or months:

  • Cognitive Biases
  • Probability
  • Investor Psychology

We’re confident the insight you gain from this series can help make you a better investor, even if you aren’t currently using TradeStops. (Though of course, if you haven’t yet experienced the power of TradeStops, we suggest rectifying that immediately!)

Another one of our goals for 2018 is to accelerate the development of TradeSmith University, our ongoing effort to enhance your education as an investor. It goes back to the same set of goals: Giving you more of the “why” behind the principles of investing… so you can make better use of the TradeStops software… in order to reach your wealth-building retirement goals.

It’s an exciting project. We’ve got some great material to draw from, and we’re confident you’ll learn a lot.

If you have any questions, comments, or just something you’ve always wanted to know about cognitive biases, probability, or investor psychology, let us know!

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Richard

Crux note: Richard’s TradeStops philosophy is to cut your losses and let your winners ride… And the results speak for themselves.

You can discover why one satisfied investor called TradeStops his “safety net” right here.


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Two things the World Cup can teach you about investing

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From Jason Bodner, Editor, Palm Beach Trader:

Last week, my phone had a temper tantrum. It just wouldn’t work and was so slow that I couldn’t take it. I took it to the phone store to see my upgrade options.

I brought my three sons. While I waited to get a new phone, they watched the World Cup game in the store.

I wasn’t paying attention, but my seven-year-old Liam proudly proclaimed that Belgium was playing Japan.

This was big deal. (And in a moment, I’ll tell you how it all relates to investing.)

You see, my wife was born and raised in a small city in Belgium. My kids all have dual citizenship. I’m the only one in the family who has just a U.S. passport.

When we left the store, the score was 0-0 at halftime. We were still confident our team would win. There was talk of how Belgium could go all the way. We seemed a sure bet against Japan. (Belgium lost to France in the semifinals on Tuesday.)

About 20 minutes later in the car, I asked Sacha, my middle son, to tell me the score…

Belgium was down by two goals and still hadn’t scored. It was quickly turning into one of the biggest upsets in World Cup history.

Sacha was bummed, but being an optimist said, “You never know… We can come back. It’s not over yet!”

I saw his face was mixed with disappointment and hope. I replied with a weak moment of adult realism: “I don’t know Sach, it seems doubtful. Sorry dude.”

I felt bad the way a dad does when he’s gotta break bleak reality to his kid.

Five minutes later, he said “Oh yeah, Daddy? Look now!” I nearly crashed the car when I saw on his phone that the score was now 2-2. I was screaming with glee with the windows open. It must have looked strange to anyone standing on the street.

When I got home, we ran into the house to watch the final minutes of the game. Belgium scored an injury-time goal to win 3-2.

My sons and I started jumping around. Belgium turned what would have been the biggest upset in the World Cup into the biggest comeback.

Aside from being a fantastic game, there is a point to this story…

You see, I was ready to throw in the towel on Belgium. Psychologically, I had given up.

There was plenty of time for a comeback – improbable as it was. But my mind had written off that possibility and given in to despair.

Sure enough, I was dead wrong. And that’s the point…

Emotion is the true enemy of investors. It can lead to despair and fear. And that can cause you to make drastically wrong decisions.

If Belgium were a stock, emotion would have told me, “I can’t take it anymore!”

I would have sold at the exact bottom.

It took me a long time to learn how to overcome emotion as an investor. Ultimately, the most important thing I had to master was my own mind.

Like most people, I have a knack for doing the wrong thing at the worst moment when I act based on emotion. That’s why I built a stock investing system to take guesswork and emotion out of it.

Your stock positions will move up and down, day-to-day, and week-to-week. The market itself will get bumpy from time to time. We all know this… Yet we still act on our feelings when it happens.

The key to overcoming emotion is to stay rational – especially when things get bumpy.

There are two ways I do this:

  • Stay patient. I need to remind myself that investing in stocks is a long-term game. I need to stick to my system and not sell out of fear.
  • Stay focused. When I feel overwhelmed by emotion, I find it helpful to take a walk or do something to focus my attention on something other than what’s bothering me. For me, listening to music or walking my dogs calms me down and helps me refocus.

Emotions cause us to react. Logic dictates that we stay disciplined. Patience and focus will get us to where we want to be.

Talk soon,

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Jason

Crux note: In case you missed it…

Palm Beach‘s crypto expert Teeka Tiwari is teaming up with political commentator and radio host Glenn Beck to create a one-off special extended broadcast live from his studio in Dallas: The Great Cryptocurrency Conspiracy of 2018.

Tune in July 19 at 8 p.m. Eastern time to discover the secret behind making money with cryptos like bitcoin – something both Wall Street and Washington would like to keep hidden from you…

Click here to register for this free event.


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