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š® Is This The Next Big Short Squeeze?
Every so often, we stumble upon an underdog stock or crypto that has been so beaten down that its price might as well be in the basement.
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Whatās on the Menu š“
Every so often, we stumble upon an underdog stock or crypto that has been so beaten down that its price might as well be in the basement.
Sometimes a downtrodden asset can bounce, squashing stop-loss orders in its wake and forcing bears to cover their short positions.
This is called a short squeeze. GME was an example where a short squeeze caused price to go from $5 to $400+ā¦
And today weāre looking at a stock that is catching a similar cult following.
Hereās what weāve got for you today:
June CPI Versus The Fed š„
How Ordinals Are Reshaping Bitcoin āæ
Small Caps: The Next Cash Cow For Investors? š®
Is CVNA The Next GME? š®
Todayās newsletter is a 5 minute read.
June CPI Versus The Fed š„
Official US inflation data for the month of June will be released on Wednesday morning, and it could challenge the Federal Reserveās narrative of sticky inflation.
The Cleveland branch of the Federal Reserve is forecasting a year-over-year increase of 3.22%, which would be another significant decline from the prior monthās inflation rate.
The Fed has been jawboning about needing to hike rates again at their next meeting due to persistent inflation that remains above their target level.
But does the chart below of the year-over-year CPI inflation rate make it seem like thereās been a lack of progress in fighting inflation?
To us it looks like the Fed is ignoring the actual data, the same way they did when they claimed that āinflation is transitoryā and refused to raise interest rates from 0% in 2021 while the CPI skyrocketed.
In other words, we think the Fed could be making another major policy mistake.
Real yields, or the difference between treasury bond yields and the inflation rate, are at their highest levels in over a decade.
TIPS are inflation adjusted government securities that show us one measure of āreal yieldsā in the bond market. TIPS yields are also spiking higher lately:
Historically, spikes in real yields have tended to hurt long duration assets such as stocks, but so far this year the stock market has mostly ignored these movements.
Last week we said it may not ultimately matter much if the Fed hikes one more time because they should be nearing the end of the hiking cycle regardless.
But we do need to keep an eye on bond yield movements in the open market because those can become untethered from Fed policy and create serious volatility in financial markets.
Donāt let the NASDAQās blistering first half performance lull you to sleep; the risks of higher interest rates are still lurking out there!
How Ordinals Are Reshaping Bitcoin āæ
Bitcoin ordinals have been stirring up the Bitcoin scene, and we're here to break it down for you, making it as easy as pie to understand.
In a nutshell, Ordinals are unique digital assets, or non-fungible tokens (NFTs), that have found a home on the Bitcoin blockchain.
Thanks to the Taproot upgrade, which was launched on the Bitcoin network in November 2021, these Ordinals are etched onto a satoshi, the smallest unit of Bitcoin.
What sets them apart from the NFT crowd is their association with Bitcoin, rather than Ethereum, making them a new evolution in the NFT world.
According to DappRadar, āOrdinals trading volume increased from $7.18 million in Q1 to a staggering $210.7 million in Q2, representing a 2834% quarterly increase.ā
Some more interesting Ordinals stats:
To date, Ordinals have generated over $55M in fees
There are currently over 15 million inscriptions
Bitcoin Bear Cubs have over 2,600 sales in the past month
Ordinals interest is up 1,900% over the past year
The introduction of Ordinals has indeed ruffled some feathers in the Bitcoin community.
On one side of the fence, we have the Bitcoin purists.
These are the folks who see Bitcoin as a peer-to-peer digital cash system, as outlined by Satoshi Nakamoto, Bitcoin's mysterious creator.
They argue that the introduction of NFTs and smart contracts, like Ordinals, muddies the waters of Bitcoin's primary function.
On the other side, we have those who see Ordinals as a breath of fresh air, bringing new possibilities to the Bitcoin world.
They argue that the introduction of Ordinals and similar technologies expands Bitcoin's utility and opens up new avenues for innovation.
The controversy around Ordinals boils down to a fundamental question about the nature and purpose of Bitcoin.
Is it a pure digital currency?
Or is it a flexible platform for innovation?
As the debate continues, the future of Ordinals and their impact on the Bitcoin ecosystem remains to be seen.
So whatās our take for the next evolution of Ordinals?
Early signs suggest that Ordinals could become a mainstay in the Bitcoin community.
As more traders and investors get a taste for these unique digital assets, the demand for Bitcoin Ordinals is likely to continue growing.
But a ton of investors have been burned during the latest NFT implosion, so weāre keeping a close eye on user adoption from now until the next Bitcoin halving in 2024.
Small Caps: The Next Cash Cow For Investors? š®
The bullish sentiment in large cap stocks (think Apple, Google, Tesla, etc) has been alive and well.
People are still plenty happy to own these big corporations and Apple has even been coined a āsafe havenā investment (even at a 30x PE ratio š).
On the flip side, investors are snubbing their noses at small and mid cap stocksā¦ and it shows.
It seems no one wants to own them in an increasing interest rate environment and as profit margins are declining ā.
Itās a lot more expensive now for smaller corporations to take on debt, and many need to keep funding growth somehow. This could be just one of the things on investors minds.
The PE ratio (price-to-earnings) is the most used metric to determine if stocks are cheap or expensive.
Mid and small cap stock PE ratios are not THAT far off of 2008 financial crisis lows (even though our economy is nothing like 2008 right now).
The gap between the PE ratio for large cap stocks vs. mid and small caps has widened dramatically looking back to 2005.
Sentiment is in the gutterā¦
And you know what the means: opportunity.
Not all small and mid cap companies are struggling.
Many are established, cash flowing, and even growing.
In fact, in a quick screener with the following info:
Russell 2000 corporations
Positive revenue growth (2% plus)
Positive free cash flow (over $0)
We see a total of 686 stocks.
So, the moral of the story is, you might be able to find a good deal on some decent smaller companies that have staying power.
We think itās about time to go dumpster diving, looking for value in small and mid cap stocks!
Is CVNA The Next GME? š®
It was tough to get through 2021 without hearing about the big GME short squeeze.
Just as people bet on stocks going higher, they can bet on stocks going lower too.
Itās called shorting, and GME had a lot of people hoping it would fall to $0 so they could make a ton of dough.
As we now knowā¦ it didnāt go down easy, and it has to be one of the greatest short squeezes of all time.
Now enter CVNA (Carvana)ā¦
Itās a company that sells cars online and theyāre known for their ācar vending machinesā.
CVNA is riddled with debt, and many investors lost faith in its future success.
Bears are betting that itās the next big name to fall flat on its face.
The short interest (%) gives us an idea of how big a short squeeze (if it happens) can really be.
A short interest of over 20% is considered high and 50%+ is VERY high. High short interest stocks are ones to watch for short-term trading opportunities.
Hereās why we think CVNA could pull a GME and squeeze shorts:
We had a member in our Wealth Building Community mention how itās likely that the recent strength higher in CVNA means shorts are probably covering (and there may not be much juice left for the squeeze in the stock).
However, looking at how GME played out, you can see that the short interest actually stayed pretty high throughout the boom and even the selloff (short interest data is recorded twice a month on the 15th and 30th).
So, taking a look at this same trend with CVNA, the short interest has held up even though price has been creeping higher.
Itās possible CVNA could follow suit, and that not that many shorts have actually covered yet.
Itās tough to tell with the price action how much of the recent buying in CVNA is from short covering vs. people simply buying it because price action is strong.
The latter could help fuel the move higher.
While CVNAās short interest is half of what GMEās was, itās still high enough to create an explosive move.
Not to mention, CVNA has been showing relative strength compared to the S&P 500 over the past few trading sessions.
Even Wallstreetbets on Reddit is back at it chatting about CVNA š.
So as CVNA shows relative strength compared to the S&P 500, a resilient short interest, and a strong bullish chartā¦
We definitely do NOT want to be short this name.
*CVNA was a trade idea mentioned in our Wealth Building Community on May 15th of this year. Get 50% off your first month or quarter in the community with promo code: BUILDWEALTH
Delicious Bites š
Labor force participation for prime age workers (25-54) is highest since 2002
Jamie Dimon lays out the bull case on America
Millionaire population % by country
15 stocks that returned over 15% over the past 10 years
Food For Thought š§
"An investment in knowledge pays the best interest."
- Benjamin Franklin
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DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We donāt offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.