As mentioned in the three profit centres of short selling, consensus shorts have a nasty habit of rallying until all short interest has been destroyed. Recent examples include Tesla, Gamestop and AMC. This partly driven by the fact that a long owner who has lent the stock out short cannot physically sell the stock until it has been bought back by the short seller. Once I understood this concept, I make it a policy to avoid consensus shorts. But just because something is a consensus does it mean the market it wrong. So to try and make money from consensus shorts, I developed the idea of “unsupported bull markets”. The idea is pretty simple, so let me walk you through a few examples. The first one I found was between Chinese steel makers and iron ore producers. China is by far the world’s biggest steel maker and consumer of iron ore. In early 2011, the share price of Angang (a large Chinese steel maker) plunged on falling profitability, but Vale, a large iron ore producer continued to rise. I took this an opportunity to short Vale in 2011. If your largest customer is in trouble, you are also in trouble.
A few years later we saw a similar dynamic play out in the US. Chesapeake, a large US natural gas producer, had seen its share prices collapse in 2014 due to the glut of natural gas in the US. Despite this, Williams Brothers, a pipeline operator that relied on Chesapeake for 25% of its revenue continued to trade at all-time highs. Eventually the market worked out again, that if your largest customer is in trouble, you are also in trouble.
So where are the unsupported bull markets now?