Bizarro Market Winning Strategies 101: Go Long The Most Hated Stocks

Tyler Durden's picture

We discussed the bullish themes (and Nomura's skepticism) earlier today but as the S&P 500 cracks 1300 once again and banks (GS cost-cutting sustainability?) and builders (NAHB Index? context please) are off to the races once again, we thought it might be appropriate to see just how well the worst of the worst has outperformed the market. Using our standby GS index that tracks the most shorted names in the broad market, we see that year-to-date, the most-shorted names are up 5.8% against the Russell 3000 which is only up 4%. Furthermore, since late yesterday, the most-shorted names have doubled the market's performance (+2.1% vs +1% from 1430ET yesterday).

Quite an impressive outperformance of the most-shorted names...today's performance seems like a resurgence after some compression to reality but...

 

...on a longer-term basis we have seen worse - right after the Thanksgiving ripfest, not to mention January of last year when we first saw a preview of just what to expect. It dose seem like we are getting stretched though - but of course that is relative and so a continued meltup in stocks does not mean retracement in short prices (just underperformance).

So as a result, we present readers with the opportunity to join the lunacy, if they so wish, and jump head first into the worst of the worst: these are the 30 companies which according to CapIQ have the highest Short Interest to Float ratio in the Russell 2000. Of course, these names are hated and thus massively shorted, for a reason. But we are now in a market in which fundamentals are not only ignored, they are vilified. So it is more likely than not that purely as a function of margin calls, borrow pull, and general revulsion toward basic long/short strategies, these stocks will continue to outperform the broader market, until they dont and crash spectacularly (which is why hedging with some cheap OTM puts is a good idea). Naturally, the suggestion to go long the most reviled stocks is encouraged only for the insane subset among our readers, or the hedge fund career risk track, or both. Usually the two are interchangeable.

A CIX of these names equal-weighted has handily outperformed year-to-date and from the mid-December lows - so indeed, we leave it up to you - do you trade the "Go Long The Most Hated Stocks" winning strategy (and pray you will be out before everyone else - because we all are the world's best market timers... at least in our own minds).

Charts: Bloomberg