The New Trump Trade: Squeeze ‘em for Every Penny

They told us the Trump trade was dead money walking.

Just a few weeks ago, the media insisted the Trump rally was crumbling. The major averages were rolling over, led by the stocks that had benefited most from the post-election rally. Every talking head on TV used the pullback as an excuse to slam the administration—along with anyone who bought into the market’s strongest comeback stocks.

Those irrational bulls who fueled the markets higher in November were finally cooked! Cooler heads prevailed and the market was unwinding. The “told you so” crowd took a victory lap.

The bears were looking forward to the market lurching lower once again this week. Too many landmines littered the markets, they argued, from Trump’s tax plan to a border wall debate and possible government shutdown.

There’s no way stocks could rally in this environment, right?

Wrong.

The major averages are blasting higher to start the new trading week. Europe lit the fuse after the first of France’s presidential elections went off without any major surprises. As overseas markets exploded higher, the U.S. averages caught fire. The Dow finished the trading day up more than 200 points. The Nasdaq Composite posted a new all-time high. Meanwhile, volatility took a huge hit. The VIX suffered its worst drop since 2011…

Financial shares—some of the foremost beneficiaries of the post-election rally— led the major sectors higher.

Anyone betting big on the market falling apart this week is already feeling the burn. More than 50 of the market’s most heavily shorted stocks gained at least 2% during Monday’s trading session.

The big squeeze included biotech names, tech shares, basic materials, and even a few hated retail stocks. After weeks of choppy action, world markets are back on track.

So much for the Trump Dump.

Our stocks are the best in the world. They’re headed to new highs. Believe me!

The bears are brainwashed by politics and stock market analysts are once again ignoring the tape in favor of political commentary. Folks who used to cover stocks are gossiping like beltway reporters.

Now that everyone is sufficiently distracted, we’re ready to watch the market rip even higher…

With the political bears out in full force and stocks getting jiggy, some of the most hated names on the market have the potential to do some serious damage this week. These heavily shorted stocks are already starting to wake up. Now they have the potential to spark the market’s next big move higher.

Here’s how it works:

Anyone who shorts a stock “borrows” that stock from a broker. And if the trade moves against them, they actually have to buy the stock to close out their position. That’s why it’s called a “short squeeze.” They literally get squeezed out of the trade. If their losses mount quickly the selling is more ferocious.

What happens when all these short-sellers are forced to buy the stock? That drives its price even higher. The exact opposite of what the short-sellers wanted.

With futures sprinting higher once again this morning, we should see plenty of lucrative squeeze plays set up before the week is finished.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning