What I've done is created an index consisting of the top 3% "most shorted" component stocks within the Russell 3000. This indicator isn't perfect and it's not done, I'd also like to create similar ones for the SPX, NASDAQ 100 and maybe the Dow just for a quick reference because whenever you sort fundamental data such as "Latest Short Interest" or P.E ratio for an entire index as large as the R3K, it is very resource intensive, especially when you are running 3 or 4 other streaming data programs on two operating systems.
Here's what the new indicator looks like so far (I still have some scaling issues, but if you use relative points, i.e. - take one index and compare it to the other index at two relative points, one at point "A" so many bars in the past or at a former high, low, etc. and compare that to the most current data, again comparing where each index is relative to the other now and at the past point, point "A")
In green I have the Russell 3000 Index.
Since we are above the range and above technical levels (or we were Wednesday)such as regional new highs, above important moving averages and such, it's highly likely there will be a short squeeze.
In fact I brought this pint up many times this week in saying, "All the market needs is an engine like one of the currency carry trades to push it up overnight or for a day, once the market passes technical levels that technical traders watch, they'll start to cover their shorts and buy"I explained this as part of the head-fake concept and did so so many times this week you must remember.
Looking at Wednesday the "Most Shorted Index" in red is clearly in a short squeeze as price moves nearly straight up with no pullbacks of any note (typical short squeeze behavior). This not only tells us what retail is thinking and what their sentiment is, we know how scared they are as they cover shorts and we can use this information and compare it to flight to safety assets like Treasuries or more recently gold and we can compare it to "Flight to protection" assets like VIX Futures or VXX / UVXY more commonly.
IF 3C IS OUT SMART MONEY INDICATOR, THIS IS OUR DUMB MONEY INDICATOR.
There were numerous signals Wednesday telling me that a move down was most likely the next (and possibly the coming) days ; as you recall I opened an IWM Put and VXX call Wednesday, clearly short term bearish trades. However if we were to watch the Indicator above, we'd see that the most shorted names started underperforming relative to the R3K at the end of day (EOD) as they didn't participate in a VERY WEAK EOD ramp effort.
For instance, the reason for the rally is so Wall St. can sell the small accumulated shares of the range and make some money-the same thing we did and are doing and then they can sell short in to higher prices, the exact same thing we planned on in establishing and filling out our core short positions for a trending trade (bear market).
A move above a specific technical level like a moving average or a clear resistance area can be created with little expenditure from Wall St., all they need to do is move the SPY Arbitrage or perhaps a Currency carry cross for a day or so, after the technical level is hit, retail will take care of the rest as you can see above with the short squeeze of the most heavily shorted stocks.
In to Thursday, look at the white trendline and note how the short squeeze ended as the green R3K made a new higher high and the most shorted Index made a pair of significantly lower highs. This tells us that there's no Wall St. support moving the market, especially when I confirmed that there were no currencies at the time that would support through a carry cross moving higher and confirmed in seeing that HYG/TLT and VXX were not going to activate the SPY arbitrage, this is another piece of the puzzle that had me opening short positions Wednesday.
After the most shorted index failed, the market saw a move lower as can clearly be seen. IN FACT, THE MOST SHORTED NAMES SAW THE BIGGEST DROP AS THEY MADE A LOWER LOW THAN THE R3K, JUST LOOK AT THE TWO RELATIVE TO EACH OTHER AT THE YELLOW TRENDLINE.
At the end of our accumulation range, again the most shorted acts better than the R3K and we get the clearest short squeeze this week as technical levels, new local highs, moves above psychological levels like Dow $15k and crossovers above significant moving averages all take place forcing a short squeeze. The EUR/JPY started the move and fundamental news from Syria exacerbated it.
I have been saying I think we get choppy trade in this are as the next short term trend and that's why I advocated "Hit and run" trades, like the options opened Wednesday, which I fully expected to close Thursday but didn't because of data suggesting there's more downside ion the coming days.
However, the Index (M.S.I.) is still at a reasonable level and not showing a strong negative dislocation like we se to the far left, there was one as you saw on the chart above this, but that is basically the chop I expected to see.
So this is another indicator, it still needs some work and there are some obvious disadvantages or imperfections in the data, but I think this will be a great tool to add to our tool box to get a lot of different information all from one screen.
If you have interest in how I created the indicator and what I plan to do to make it more reliable, just email me.
"TO MAKE MONEY IN THE MARKET YOU HAVE TO SEE WHAT THE CROWD MISSED"
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