Target: a painful short squeeze!

If you are tired of hearing me talking about Target (TGT), bear with me one more time. There is something to learn if you have closely followed the pathway of TGT in the past year or so. When Target got crashed, I was among the few who was against the herd and advocated to buy, not sell. TGT bottomed around $55 and since then it was largely trading in the side way fluctuating between $55-65 in the past year (the red lines). For those who wanted to make quick money with TGT, they would certainly have been very disappointed but for the long-term investors like me, I have just been very happy to buy and hold to enjoy good dividends. Even more, TGT has been an ATM machine for me over the past year because I have literally extracted thousands of dollars from it, taking advantage of its low valuation and good prices. Since May of this year, TGT started to shown a bullish uptrend: higher highs and higher lows (green). This was an early sign that TGT had recovered and was gaining energy to jump. Then 2 days ago, it finally fiercely broke out beyond its resistance. It jumped 8% in one day to as high as $72 due to an unexpectedly strong earning report. But be aware, this kind of price action with such a forceful move within hours (yellow) is a text-book short squeeze. It is often the case that when a stock is out of favor and hated by the Street, the herd investors will brainlessly just follow each other to short the stock. They have been brain-washed to think that such a stock has no way to go but down.Unfortunately things are not always go as they would expect, especially for quality stocks. When the trend suddenly changes, those who short heavily get caught up and often are forced to buy back the stock to close their short positions to avoid even larger losses. The cumulative effect of such forced buying will push the stock price to go up unbelievably fast. That's called short squeeze! Short squeeze for a moving up stock often creates a short-term "bubble", i.e. an extremely overbought condition, which is usually followed by a mini crash. Therefore, for quick traders, this is an opportunity to short the stock at this level to make some quick money. But this is only for very experienced traders and for a super short-term.

So what's the learning?

• Herd behavior is often the contrary indicator: when everyone wants to buy, you should avoid or sell; when everyone wants to dump, you should consider to buy
• Buying good quality stocks with track record of paying increasing dividends is the safest wealth-building strategy. The trick is to buy at good prices. Hope my blog can help to identify such stocks and timing. You can sleep well at night by buying such stocks when the herd is dumping. Soon or later, the share price will come back to normal and more.

For now, I guess you know what I'm going to say: don't immediately buy TGT as I expect it will "crash" before moving further up. But buying IBM at its current level is great to me. The sentiment for IBM is extremely low and the herd is dumping.