Tech stocks put out a spectacular rally yesterday. In fact, our tech-focused Investors in Innovation portfolio soared a jaw-dropping 9% yesterday alone.
The wild of that. Some years, the stock market will last a full 12 months and not rally by 9%. Our portfolio rallied that much in one day.
And guess what? Things could get better in the next few weeks for tech stocks because of something traders like to call “short squeeze”.
Here is the story.
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Next week is the biggest week of the quarter for tech companies. Alphabet (NASDAQ:GOOG), PayPal (NASDAQ:PYPL), Advanced Micro Devices (NASDAQ:AMD) at Electronic Arts (NASDAQ:EA) all earnings in today’s report. tomorrow Meta (NASDAQ:FB), Spotify (NYSE:SPOT) at Dynatrace (NYSE:DT) be the center of the stage. On Thursday, it was Amazonby (NASDAQ:AMZN) turn to report quarterly numbers, incl Activision (NASDAQ:ATVI), Snap (NYSE:SNAP), Pinterest (NYSE:PIN) at Unity Software (NYSE:U).
If last week’s numbers are any indication, then this series of upcoming technology revenue reports should be pretty good.
After all, last week, Apple (NASDAQ:AAPL) reported record numbers. And so too Microsoft (NASDAQ:MSFT), Service Today (NYSE:NOW) at Atlassian (NASDAQ:TEAM). The consistent theme is that the pace of technological transformation is accelerating across enterprise America, setting the stage for all of the aforementioned tech companies to report large numbers this week.
Abbreviated Tech Stocks
Ahead of these earnings, however, many tech stocks are overly shortened, especially speculative tech stocks.
We present this chart to our Investors in Innovation subscribers yesterday. This includes a group of tech stocks in our Investors in Innovation portfolios and their short interest ratios. We have removed the names of the stocks from the chart below, but the picture of the data is still clear. Short interest in tech stocks has risen sharply over the past few months.
Click to Enlarge
It appears that many of those short sellers are worried that because of last week’s strong technology earnings, most technology companies will report large profits in the coming weeks.
That’s a problem because before those earnings, a lot of investors were “short” on those stocks. When strong headline news converges with a high short interest, you get the so -called a short squeeze, where buyers push the stock price higher on strong news. This forces short-sellers, who are forced to repurchase their borrowed shares, which adds to buying pressure and often creates a supercharged rally in the stock.
Short squeeze rallies are likely to be overwhelming, fast and furious. And increasingly it looks like tech stocks may be sprinting towards a short squeeze that will be fulfilled over the next few weeks.
Yesterday’s rally in tech stocks was about short sellers trying to anticipate potential squeeze by covering early. But short -term interest against technology remains elevated. And if technology revenues are strong this week, you’ll see that tech stocks that are too short soar in the stratosphere.
Playing Short Squeeze
Want to know how to best play this potential short squeeze?
Well, as I said at the top of this note, our own Investors in Innovation the portfolio rose more than 9% yesterday.
So if you want to play what could be a big short squeeze on tech stocks over the next few weeks, you may want to start by checking out the stocks we own in that portfolio. To do this, click here.
But don’t forget. In an instant, critical technologies like AI, blockchain and EV are fundamentally reshaping our world faster than most people understand. Investors who are on the right side of these changes will earn tremendous amounts in the 2020s. And investors on the wrong side risk losing everything.
Investors in Innovation you will be placed on the right side. In the long run, we don’t think any portfolio will beat us.
Click here to learn more.
At the date of publication, Luke Lango does not (whether directly or indirectly) any positions in the securities mentioned in this article.