In late 2010, stocks were rebounding after some pretty lame economic data in the summer, and investors didn’t believe in the rally. Bets against that rally accelerated. But those bearish bets actually led to the rally’s acceleration. And consequently, the stock market rallied big into mid-2011.
It happened again in late 2011. The market was rallying big as it tried to recover from the fallout of the European Debt Crisis. Lots of investors didn’t believe in it. Bearish bets rose. But from late 2011 to mid-2013, the market surged 50% higher.
Then it happened in late 2015 and early 2016. The market was rebounding from an oil price collapse. Investors weren’t buying it. Bearish bets rose. Stocks proceeded to surge higher in 2016 and 2017.
And, of course, it happened in early 2020. Stocks were on the rebound after the pandemic-induced market crash. Investors kept questioning the rally’s durability. Bearish bets rose. But stocks just keep powering higher. And the balance of 2020 into 2021 saw enormous stock market returns.
This happens time and time again. It’s a repeatable cycle.
- Stocks collapse after bad news.
- They start to rebound once the news starts to fade.
- Investors – still remembering the bad news – don’t fully believe in the rally and bet against stocks.
- But the bad news keeps fading, and stocks keep rising.
- Those shorts are forced to cover. The market rally kicks into a higher gear. Investors who buy the dip and stick with the rally make a ton of money.
Will it also repeat this year?
[adapted from: https://www.iqstock.news/n/big-short-squeeze-brewing-stocks-bullish-4392746/]
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