The Next Short Squeeze

The GameStop saga last week increased the probability for more short squeezes as the "video game mob" targets more vulnerable stocks with high short interest, despite fundamental valuation. Last week Digest Issue 4 "Bulls Blowing Bubbles [Charts]" showed one easy way to indentify short squeeze targets when hunting for the next short squeeze candidate. Below are more all based increasing option implied volatility. First, the Market Review with thoughts about the correction underway.

S&P 500 Index (SPX) 3714.24 dropped 127.23 points or -3.31% last week after making a new closing high last Monday then a new intraday high at 3780.90 and key reversal on Tuesday before breaking down on Wednesday. Another breakdown on Friday confirmed the end of the upward sloping channel formed on the Pfizer vaccine day, November 9. Now slightly below the 50-day Moving Average at 3715.95 and well below the operative upward sloping trendline from the October 30 low, support between 3600 and 3550 could limit the decline to a 6% correction.

CBOE Volatility Index® (VIX) 33.09 spiked up 11.18 points or +51.03% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 9.34 points or +56.00% ending the week at 26.02%.

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VIX Futures Premium 

This indicator quickly turned from bullish to bearish as the VIX spiked up well beyond the entire futures curve that's now sloping downward to the right. The volume-weighted premium for the first two nearest futures ended Friday at -7.74% in the red bear zone, vs. 16.58% on January 22.

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Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. 

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Disclaimer: IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...

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