You May Not Like the Shorts, but Sometimes, They're the Only Buyers Out There
Let's look at several stocks to see what types of buyers might have been demanding shares.
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I have spent a good deal of the time in the last six or eight weeks noting that we’ve got a stock picker's market and a lot of group rotation. Last week, when the drugs finally popped, they didn’t just rally, they soared. At the time, I said I thought there was quite a bit of short covering going on.
Let me show you why I think that and why I think there is a lot of that going on. There are stocks that gap and go, but we have a lot more stocks that gap up and then slowly start to die again.
Dutch Bros (BROS) is not a major stock, and it certainly isn’t an AI stock or even a metal or rare earth name. But do you see that gap up in early August? It was on earnings. I recall seeing the report and wondering why the stock had gapped up so much. Clearly, there were shorts running for cover.
But look at the action since: a dip, a rally, and then down 30% in a straight line. There is a view that short selling is bad, but you see, shorts are buyers when stocks come down. Run in all the shorts and the buying can—it doesn’t have to, but it can—be MIA on the next trip down.
It’s got some support here, but let’s consider this another restaurant stock that has been an out-of-favor group (rotate out).
Oracle (ORCL) had a massive gap up in early September. Was it short covering? Well, if it was a lot of fresh buying, why didn’t it gap and go?
But let’s go back to early August when Meta (META) gapped up on its earnings. Once again, there was no gapping and going. It was gapping and churning, and eventually, here we are two months later with it filling the gap from late July. Notice that it bounced off that gap fill and support to close higher on the day. I figure Meta was down so much in the last month, which must be why no one even asks about it anymore. Now it is more interesting, isn’t it?
AppLovin (APP) was a gap and go, as it didn’t look like shorts were running for cover. But after a nearly two-hundred-point run from that gap, it managed to come right back down in a week. I don’t have a strong view on APP here, but if it wanted to come down and fill that gap and tag that uptrend line, then I would think folks would be ready to rotate back into it.
As for the market as a whole, we’re at seven green days and counting. My view is that the longer the streak goes on, the more apt we are to end it. And Monday’s low-quality rally had the feel of folks getting a bit too giddy. The put/call ratio got the lowest it has been since May.
