Nasdaq Bulls Eye Squeeze Opportunity, Bears Fancy Repeat Of How Index Collapsed Late ’08

In the latest period, Nasdaq/QQQ shorts went on an offensive. The index/ETF rallied to a fresh high last Friday. Longs are salivating over the jump in short interest as yet another squeeze opportunity. In the past, zealous bears have repeatedly been forced to cover helping the bulls, but this does not necessarily have to always end in a similar fashion.

It is easy not to like the present fundamental story. The US economy has been ravaged by the COVID-19 pandemic. Most macro data for February, March and April were abysmal, with some improvement in May. June numbers for several metrics will be out this week, including retail sales, which will be out Thursday.

Retail sales peaked in January at a seasonally adjusted annual rate of $529.6 billion. Then the virus hit, and the bottom fell out. By April, sales were down to $412.6 billion. May snapped back with a month-over-month growth of 17.7 percent but remains 9.1 percent from the record high.

Numbers have been volatile the last several months. A three-month average helps smooth this out. On that basis, sales were down 10.5 percent year-over-year in May, which was the worst performance since June 2009 (Chart 1). In the last recession, this metric got stuck in the negative territory for 14 straight months.

Data like this fan negative sentiment. April’s retail sales were at a seven-year low. In that same month, the University of Michigan’s consumer sentiment index hit 71.8 – the lowest since December 2011 (not shown here).

Leading up to this, as stocks collapsed in February and March, shorts were getting aggressive. Mid-March, short interest on QQQ (Invesco QQQ Trust) jumped to 68.5 million shares – a 15-month high. Major US equity indices, including the Nasdaq 100, bottomed on March 23rd. Soon, shorts turned tail, cutting QQQ short interest to 55.3 million by mid-June, providing a big tailwind for QQQ/Nasdaq 100.

This phenomenon has been going on for a while. Zealous bears seize on lousy fundamental data, aggressively build short position, bulls stay put, and a squeeze follows. Shorts are at it again.

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