Last Wednesday a burger chain jumped 15% and got halted for volatility.
Nothing had changed about the burgers.
Wendy’s spent the year getting taken to the woodshed.
Same store sales in the US fell 7% last quarter and traffic dropped more than 12%.
The board cut the dividend by more than half and pulled its outlook for the year. They’ve closed 289 restaurants in six months.
Every metric looked brutal.
And when things look dead, that’s when the vultures come out.
Roughly 30% of the stock was sold short.
Almost a third of every available share had been borrowed and sold by someone who needed the price to keep going down.
Then Reuters reported that Nelson Peltz and Trian were assembling a group to buy the whole company.
I spent close to a decade as a market maker on the exchange floor, which means I’ve stood on the other side of that print more times than I can count.
So I know what a morning like that looks like from the inside. Almost nobody buying Wendy’s wanted to own Wendy’s. They were being bought in.
When you’re short a stock and it gaps against you, your broker doesn’t ask how you feel about the fundamentals.
You get a call, you cover, and you pay whatever the offer is, because the offer is the only thing between you and a worse loss.
That’s why squeezes look so violent on a chart.
Every buyer in that flow is a person who has to buy, and has to buy RIGHT NOW.
The fuel builds in public
The more obvious a company’s decline becomes, the more crowded the short side gets. Everyone climbs onto the same side of the boat, because the story is easy and the story is correct. Wendy’s was struggling and the bears had it right.
Being right on the short thesis is what sets the trap.
The short side gets crowded on the way to being correct, and the crowding is what blows up.
Short interest is published, the float was small, and the pressure was measurable for weeks before anything happened.
Licia and I had Wendy’s calls on from July 16, which was 27 days before the headline ran. We closed them the day it broke, up 63%.
Same pattern, different clocks
Wendy’s was the patient version.
Uranium Royalty ran the same shape in a week. We paid 20 cents for the calls on July 30 and sold at 49 cents on August 6. It never made a front page anywhere.
Western Union ran it in 49 minutes. Bought at 25 cents on the morning of August 4, sold at 60 cents before lunch.
Three stocks, different industries, and nothing in common except a crowded short side and a small float.
And that’s the trouble with squeezes. They’re findable in advance and almost impossible to catch by hand.
There are thousands of names trading under $10, the conditions shift every session, and by the time a squeeze is obvious on a chart the money has already been paid to somebody else.
So I stopped trying to watch it myself and built something that watches for me.
It’s called Alpha AI, and it watches for 4 tripwires that have to trigger before a squeeze can form. One or two of them show up on plenty of stocks and mean nothing at all. When all 4 hit the same name in the same week, we go hunting.
Three mornings, starting tomorrow
I’m walking through all 4 of them live, on camera, Wednesday through Friday at 10:30 AM ET.
Day 1, Wednesday the 19th. What a squeeze season looks like, why GameStop and AMC were so hard to trade even when everybody in the world could see them, and the story of the first million dollar trade I ever made.
Day 2, Thursday the 20th. The system itself, the 4 tripwires, the top names on our watchlist this week, when to use stock instead of options, and the full teardown of Uranium Royalty and Western Union.
Day 3, Friday the 21st. The mechanics of a squeeze, the single biggest mistake people make trading them, how to tell a fakeout from a breakout, and then we go find a live one together.
Thirty minutes a morning. It’s free, and it starts tomorrow.
And if you leave a phone number on the sign up page, I’ll send you this week’s short squeeze watchlist before Day 1 begins, so you’re looking at the names while I break down the method behind them.
Your Only Option,
Mark Sebastian