The stock market rally has been extremely fun.
We have made a ton of money … and will continue to do so.
But it hasn’t been as much fun for a certain group of investors — the bears.
A bear is an investor who has a negative outlook and is betting markets will fall. The bull investor is the opposite: extremely optimistic. Personally, I’m a trader, so I’ll take whatever the market will give me. Bullish … bearish … doesn’t matter. I just want to make a nice profit.
But it takes these two sides to create a market.
The bears use what’s known as shorting. Shorting is when a trader sells shares on margin that he or she does not really own and, thus, benefits as prices head lower.
Needless to say, the 25% rally the market experienced since the lows a year ago has sent many of these bears running scared. Take a look:
As you can see, short interest as a percentage of shares outstanding (the white line) is the lowest it has been in three years.
But the act of shorting requires traders to buy the stock back when they reduce their bets, as we have seen happen above. That creates what is called a short squeeze — creating buyers in a stock market that has already been going up, pushing it even higher.
That’s helped fuel the current stock market rally, specifically last year’s gains and the post-election bump.
For me, I’m a contrarian.
So when the market is filled with euphoria and the bearish investors are running scared, it makes me nervous. And right now, the bears are jumping ship, so I’d keep my bearish bets in place, not chase the rally and buckle down for what will likely be a wild few months ahead.
Chad Shoop, CMT
Editor, Pure Income
P.S. While the bulls and bears battle it out for control of the broad market, there are still ample opportunities to be found. In fact, an average of 43 stocks rally more than 1,000% each year. And my colleague Paul has developed a unique system for identifying these winners. To learn more about his system and rake in your own massive gains, sign up for the Extreme Fortunes Summit webinar.