Short-squeeze mania, 2024 edition… How Jonathan Rose called the GME trade months before "Roaring Kitty"… Biden gets tough (?) on China… OpenAI is coming for your iPhone… And AAPL could be set to benefit… Your last chance to cut through the AI noise with a proven signal…
By Michael Salvatore, Editor, TradeSmith Daily
“GameStop short sellers lose $1 billion in first hour of trading.”
2021 called, and it wants its headline back.
Here we are this week in another short-squeeze mania.
Sunday night, a single tweet from the notorious Roaring Kitty – who both called and propagated the 2,000% run in GameStop (GME) stock back in 2021 – sent the stock surging once again, nearly 120% on the high of the following day.
He did it without a word… but rather an image signaling “it’s game time.”
It’s worth reflecting on the first arc of the GameStop story. The event showed us just how irrational markets can be in both the short and long term.
For every trader who made multiples riding GME through the short squeeze on the way up, there are 10 more who bought too late and have held through the losses… waiting for a day like today when they could take some risk off the table.
This second act thus far seems to be much the same. Only this time, the mere presence of the original trade’s champion is enough to get the money to pile in. GME shorters, if there are any left after today, ought to be quaking in their boots.
(Just like then, GME is in a short squeeze. It’s a phenomenon where traders target heavily shorted stocks with the aim of forcing short sellers to buy back stock at increasingly high prices to avoid going bust.)
If you’re going to hold GME stock based on what’s happening, at least go into it knowing what kind of business you’re buying.
It holds a middling Business Quality Score of 54 and a sky-high Volatility Quotient of nearly 66%. It also just so happens to be in the brick-and-mortar retail video game business. If you follow the industry, and understand that digital distribution has completely eaten that business model’s lunch, you know there’s not much future there.
But we should be clear. No intelligent investor is buying GME right now because they believe the business will thrive going forward…
You'll realize it's a new AI invention that could soon make a lot of people wealthy.
❖ The GME story is about volatility and order flow…
The GME trade is, and was, pure speculation… Rebellious, almost activist trading in a concerted effort to blow up those who make money when businesses fail.
There was a hint of nostalgia at play, too… and it’s all since morphed into a bizarre allegiance to the stock, likely driven by a bunch of underwater positions.
But it’s worth understanding that the trade’s origins are in far more technical factors.
The order flow showed traders back in 2021 that GameStop was one of the most shorted stocks on Wall Street. And the volatility was these traders’ tool to exploit the unique situation… taking GME multiples higher in a span of days.
And these two factors – order flow and volatility – are where Jonathan Rose thrives.
Regular TradeSmith readers are no strangers to order flow. It’s part of Jason Bodner’s incredible Quantum Edge Pro system, which seeks out signals of institutional activity in small- and mid-cap stocks.
But Jonathan uses order flow a bit differently. He’s looking for unusually large volume in specific options contracts. At times, this activity can signal insider knowledge… or otherwise high conviction on a stock’s short-term direction.
The other half of the equation is volatility. To make big gains in options, you need volatility to either quickly rise or fall – depending on your strategy.
Jonathan’s been using these techniques for years. In fact, check out this screen grab from his recent Masters in Trading Live stream:
Jonathan published research on GameStop twice in August 2020… and then again in late January 2021 – just before GME lifted off and took over the financial world.
It makes sense that Jonathan found GME when he did. When you’re screening for order flow and volatility, like Jonathan is, opportunities like that one with GME jump right to the top of the list.
Regardless of your decision, make sure you’re following along with Jonathan’s free daily Masters in Trading Live streams. He's sharing fresh analysis and teaching you to make better short-term trades with every 15-minute stream. Sign up here.
❖ Biden's China tariffs – posturing or protecting?
On Monday, the Biden administration imposed a number of increased tariff rates on Chinese goods – with the biggest on EVs, semiconductors, batteries, and medical equipment. This graphic from Bloomberg shows the change well:
The EV tariff rate is by far the biggest jump, so let’s focus there first. The Biden admin is imposing a 100% tariff on imported EVs from China. That means Chinese EV-makers would have to sell their cars at half the cost they’d charge in other regions just to stay competitive.
Sounds pretty harsh… until you realize that next to zero Chinese EVs are sold in the United States as it is.
The Biden admin understands that China is well ahead of the U.S., Europe, and other Asian markets on EVs. Reports are that they’re of much higher quality for far less cost.
So while there’s no market for Chinese EVs in the U.S. now, there certainly could be one in the future if one were allowed to develop. The White House is attempting put a lid on that with this tariff. Or, at least seem like it is.
In reality, some EV companies are already working on a backdoor into the U.S.
BYD, which trades over the counter under ticker BYDDY, is the world’s largest EV maker – Chinese or otherwise. It’s also reportedly scouting out factory locations in Mexico with the intent of assembling their vehicles there – entirely avoiding the tariffs, which apply to goods assembled in the targeted countries – and selling them throughout the Americas.
This means that unless the tariffs are expanded to include other countries of assembly for Chinese companies, the effect is nullified. Could that happen? Absolutely. But the fact that it wasn’t from the outset tells us that the latest move from the Biden admin was more bark than bite – designed to appear tough on China in the run-up to the November elections.
Does this mean we should buy Chinese tech stocks, after they’ve underperformed for the last two years? More on that this weekend…
Almost overshadowed by GME and the China tariffs on Monday was OpenAI’s presentation on its new GPT-4o chatbot.
The big news was twofold:
This new iteration of ChatGPT would be free for all users.
Its main form factor – a Siri-like digital assistant – was seriously impressive… and a sign that OpenAI is ready to take on that market niche.
The reason this matters is, let’s face it, digital assistants are pretty lousy – and Apple’s Siri might be the worst of them.
My fiancé turned off Siri on her iPhone years ago and never thinks to bother with it. What it can do well – setting alarms, checking the weather, pulling up quick facts – can be done just as easily, if not more, with the traditional touchscreen input. It’s not scheduling your appointments or remembering to send your mother flowers, like a real assistant would.
OpenAI aims to change that with GPT-4o. It’s a new version of its Large Language Model all its own. But the big innovation is its verbal interface, where you can talk to ChatGPT just like you would talk to Siri… only it’s a lot more clever and sounds a lot more human.
If you’ve ever seen the movie Her, where Joaquin Phoenix’s virtual assistant becomes his virtual girlfriend, it might seem a bit uncomfortably familiar.
But let’s take this back to Siri, and therefore Apple (AAPL).
We showed you a few weeks back that Apple and OpenAI were said to be working on a deal to bring ChatGPT to iPhone. What we saw this week may be the first demonstration of that.
There’s no guarantee this will happen, and it’d be very unlike AAPL to license a competing software for its flagship product.
If it were to happen, though, Apple could tout a totally revamped Siri as a true innovation for its next iPhone. And that could be the killer AI app that Humane’s Ai Pin and Rabbit’s R1 proved not to be… leading to more iPhone sales across the board and helping the company out of the rough spot that inspired Warren Buffett to sell part of Berkshire Hathaway’s position.
Despite the last year of stagnation, AAPL’s business quality hasn’t changed. It still rates a 96 on TradeSmith’s Business Quality Score, and a Strong Bullish 94 on the Ratings gauge. Importantly, it also entered the Green Zone just over a week ago, making it a clear buy from our perspective.
But this is far from the only thing to watch on the AI front…
And this is just the latest innovative method ultra-rich hedge funds use to rip off everyday traders.
Back in March, you might’ve seen a story going around that Citadel Securities, one of the world’s largest hedge funds, was being accused of “spoofing.” (The same Citadel that drew the ire of GME short-squeezers.)
“Spoofing” is when large hedge funds use advanced algorithms and techniques to feed what’s essentially fake order flow to the market. They make it appear as if large institutions are selling en masse, when really the idea is to scare the market into following their lead… before swooping in to buy shares on the cheap.
One former Solomon Brothers trader, Michael Lewis , claimed in his book Flash Boys that Wall Street uses advanced algorithms to skim over $160 million a day, right off the top of their customers’ profits… coming out to $40 billion a year.
They do this by purchasing order flow from the major brokerage houses, and ensuring you get a worse execution on your trade than they do. Even if the difference is a few pennies per trade, it adds up to significant profits for them at your expense.
They’ve been using dirty tricks just like this for years, decades even.
TradeSmith recognized this problem years ago and worked tirelessly on a solution for it.
And thanks to a new breakthrough in what we call "boosted machine learning," you're now able to flip Wall Street's own tactics against them… with an AI algorithm designed to help you stay ahead.
Since the start of the year, this algorithm has already delivered quick gains of nearly 9% in 3 days on NVDA, over 6.6% in 10 days on META, and over 3.5% in a single day on AEO.
Keith also just released a presentation all about TradeSmith's newest AI breakthrough, including how it can help you turn the tables on Wall Street. Check that out right here.
The future with AI doesn’t have to be scary… not with the many TradeSmith tools on your side. Keep reading TradeSmith Daily to uncover new ways to beat Wall Street and profit from this changing world.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
Get Instant Access
Click to read these free reports and automatically sign up for research throughout the week.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
Post a Comment
Post a Comment