Tech stocks pulled off an amazing rally yesterday. In fact, our tech-focused Innovation Investor portfolio soared a jaw-dropping 9% yesterday alone.
That’s wild. Some years, the stock market will go a full 12 months and not rally by 9%. Our portfolio just rallied that much in a single day.
And guess what? Things could get even better over the next few weeks for tech stocks because of something traders like to call a “short squeeze”.
Here’s the story.
The week ahead is the biggest week of the quarter for tech companies. Alphabet (NASDAQ:GOOG), PayPal (NASDAQ:PYPL), Advanced Micro Devices (NASDAQ:AMD) and Electronic Arts (NASDAQ:EA) all report earnings today. Tomorrow, Meta (NASDAQ:FB), Spotify (NYSE:SPOT) and Dynatrace (NYSE:DT) take center stage. On Thursday, it’s Amazon’s (NASDAQ:AMZN) turn to report quarterly numbers, alongside Activision (NASDAQ:ATVI), Snap (NYSE:SNAP), Pinterest (NYSE:PINS) and Unity Software (NYSE:U).
If last week’s numbers are any indication, then this slew of upcoming tech earnings reports should be pretty good.
After all, last week, Apple (NASDAQ:AAPL) reported record numbers. And so did Microsoft (NASDAQ:MSFT), ServiceNow (NYSE:NOW) and Atlassian (NASDAQ:TEAM). The consistent theme is that the pace of technological transformation is quickening across enterprise America, setting the stage for all those aforementioned tech companies to report great numbers this week.
Shorted Tech Stocks
Ahead of these earnings, however, many tech stocks are being heavily shorted, especially speculative tech stocks.
We showed this chart to our Innovation Investor subscribers yesterday. It includes a group of tech stocks in our Innovation Investor portfolio and their short interest ratios. We’ve redacted the names of the stocks from the chart below, but the data still paints a clear picture. Short interest in tech stocks has risen sharply over the past few months.
It appears that many of those short-sellers are concerned that given last week’s strong tech earnings, most tech companies will report strong earnings in the coming weeks.
That’s problematic because ahead of those earnings, lots of investors are “short” those stocks. When strong fundamental news converges on a high short interest, you get what’s called a short squeeze, wherein buyers push the stock price higher on the strong news. This pressures short-sellers, who are then forced to buy back their borrowed shares, adding to the buying pressure and oftentimes creating a supercharged rally in the stock.
Short squeeze rallies tend to be enormous, fast and furious. And it increasingly looks like tech stocks could be sprinting toward a short squeeze that will materialize within the next few weeks.
Yesterday’s rally in tech stocks was all about short-sellers trying to get ahead of that potential squeeze by covering early. But short interest against tech remains elevated. And if tech earnings are strong this week, you could see those heavily shorted tech stocks soar into the stratosphere.
Playing the Short Squeeze
Want to know how to best play this potential short squeeze?
Well, as I said at the top of this note, our very own Innovation Investor portfolio soared more than 9% yesterday.
So if you’re looking to play what could be a huge short squeeze in tech stocks over the next few weeks, you may want to start by checking out the stocks we own in that portfolio. To do so, click here.
But don’t forget. Short squeeze aside, critical technologies like AI, blockchain and EVs are fundamentally reshaping our world faster than most folks can comprehend. Investors who get on the right side of these shifts will make enormous sums of money in the 2020s. And investors on the wrong side risk losing everything.
Innovation Investor will put you on the right side. Long term, we don’t think any portfolio will beat ours.
Click here to learn more.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.