There’s nothing sweeter in life than watching justice served – except perhaps watching it happen while making a profit. It’s the culmination of a disciplined regimen of patiently waiting and monitoring the data, and then jumping in at the right time for maximum returns.
And the timing is right as a spring in the market has been coiling for a while, and it’s ready to snap back hard. It’s a tense buildup of short-selling activity targeted at the most respected silver name in the resource space. The outcome of this buildup can be seen from a mile away, and it won’t end well for the short side of the trade.
Betting against the short sellers is a strategy that’s usually reserved for sophisticated market traders who watch the daily order flow very carefully. When the wave turns in the other direction, it’s like a dam breaking as the shorts are forced to liquidate their positions all at once.
When short sellers borrow money from a bank to bet against a company, they’re paying interest on that borrowed capital. Therefore, it’s costing them a pretty penny just to hold on to their short positions. And if the stock they bet against goes up sharply in value, sooner or later the bank will force them to exit their positions for a loss.
That’s why I’m constantly on the lookout for buildups in short positions, especially in stocks that have no reason to go down. Trust me when I tell you that this strategy of anticipating a massive “short squeeze” should only be used with a small handful of top industry names – keep your “short list” as short as possible.
To give you an idea of what this looks like in action, check out the recent short interest in First Majestic Silver stock (TSX:FR, NYSE:AG). The buildup here is unbelievable and, in truth, unsustainable:
It’s extremely rare to see a ramp-up in short positions like this, and I look for these things on a daily basis. When it does occasionally get to this level, you can count on a snapback and I assure you it’s going to be nasty when the shorts are forced out of their unenviable positions.
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But that’s the name of the game when someone tries to bet against a silver legend like First Majestic. I’m not sure what the heck they were thinking, as anybody can look up the historical performance of FR and AG shares:
108% single-year gains at the end of last year (none of First Majestic’s peers even came close to this price performance)
144% five-year return
212% 10-year gains
For all intents and purposes, the short sellers are standing in front of a moving train and acting as if they can stop it with sheer willpower. It won’t be long before their fantasy is shattered as the banks give them an unfriendly margin call asking them to pony up on their underwater short positions.
Maybe they can live in their fantasy world a little bit longer, but it will be sad to watch them learn a lesson the hard way: don’t bet real money against a consistent performer like First Majestic. And when I’m tabulating the returns on my long position, I’ll keep the hapless short sellers in my thoughts as they’ll have my most sincere condolences for their losses.
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