Our call that the short-term rally in silver would not last very long at all...and our call that the heavily “squeezed” stocks that had rallied so strongly recently...were very vulnerable to a big decline...worked-out quite well yesterday. Silver basically gave-back everything it had gained over the previous two trading days...and many of those individual stocks got clobbered. (GME -59%, AMC -41%, BBBY 16%, etc.)
The relief that those leveraged short sellers have received so far this week has helped the broad market bounce-back from last week’s decline. In other words, those who got squeezed last week got some serious relief from de-leveraging that they were engaging in...so the broad market has also received some relief from the de-leveraging it experienced last week as well.
The good news is that a return of the substantial de-leveraging that resulted from that short squeeze is unlikely to return...at least not in a significant way. There are only a small number of stocks that have extremely high levels of short interest...so now that a large portion of that short-interest has been worked-off (covered), the odds that we’ll get another big round of de-leveraging due to losses from highly leveraged short sellers are low.
However, the bad news is that there are many other areas in the market place that STILL have HUGE levels of leverage...as can be seen in the record levels of margin debt that exist today. Therefore, even though it is very unlikely that another major short squeeze will lead to another round of de-leveraging...it is still quite likely that we’ll still see another round before long. At some point, another big, highly-leveraged (crowded) trade will get decimated at some point in the future...and it will lead to another big round of de-leveraging. In fact, it should be a much bigger round of de-leveraging...given how much more leverage there is in many other areas (on the long side of the market).
As we’ve been saying for the past week or so, the bounce-back could be a strong one. Heck, “double-tops” are frequently seen at times like these...so we could easily re-test the old highs...or even exceed them. However, whenever margin debt hits record highs, it is always followed by a serious round of de-leveraging eventually. Therefore, last week was an important “warning shot across the bow” for the markets...and investors should take heed...and react accordingly.
We get the employment report on Friday, so that could certainly have an impact on the stock market. However we think the most important thing to watch over the rest of this week could/should come before Friday. The item that could be more important will likely be the action in AMZN and GOOGL. They both reported fabulous earnings last night and both are trading higher. (AMZN’s rally is a bit subdued given the news that Bezos is stepping down as CEO, but since his replacement is a 25 year veteran of AMZN...and is HIGHLY respected...the stock is still trading nicely higher in pre-market trading.)
The thing is, we’ve seen several other tech names report great earnings during this earning season...and it turned out to be a “sell the news” situation (which we saw in AAPL). Many of these stocks saw initial rallies on the day after they reported...but those rallies quickly faded...and the stock headed lower rather quickly. This did not take place in all of these instances. For example, MSFT rallied nicely...and was able to hold its gains. Therefore, the question right now is whether these two stocks will hold up (like MSFT did)...or if they roll-back over rather quickly (like AAPL and several other did).
Given the fact that these mega-cap names have acted quite well over the last week or so, whether these two stocks trade like MSFT...or trade like AAPL...over the next two days could/should be important to what happens in the rest of the stock market as we move further into the month of February.
We want to finish by looking beyond the impact a “sell the news” reaction will have on the broad market...and touch on the impact a “failure” after the initial bounce will have on these two individual stocks if they do indeed roll-over. (We readily admit that this is a BIG “if”, but since it has happened to several other names this earnings season, it’s something we think is important to cover.)
We believe that AMZN will be a bit more vulnerable IF it “fails” this week. As great as its fundamentals have been recently, AMZN has not been able to break above its early September highs of $3,500. It got very close to that level in October, but then rolled-back over rather quickly. Therefore, if it “fails” to break above that level once again...for the third time...some of the momentum players will be likely to throw-in the towel on a short-term basis...and it could cause a material decline in the stock. (The last two times AMZN failed at this $3,500 level, it fell 19% and 15% respectively.).....On the other hand, GOOGL has broken significantly above its own September highs, so any “failure” at these levels is much more likely to be a mild pull-back than it is for AMZN.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.