There are plenty of indicators out there that mean you should sell a stock, but there are few that are as rock solid as this one: whenever you see a stock that’s being heavily shorted and also heavily hyped at the same time, you should be selling that thing nine ways from Sunday, Cramer says.
Hype can mean many things, but in this case Cramer is talking about analyst recommendations, celebrity endorsements and much-touted facts in the media that don’t actually mean anything for a company’s bottom line.
Combine that with a big short interest and you have a dangerous mix. Remember, shorting is basically people buying a stock high and selling it low, instead of the other way around. Shorts are betting a stock is going to go down and they’re typically right about as often as they are wrong. However, when they are up against a group of hyped-up, entirely positive analysts, the shorts tend to be right a whole lot more.
Shorting a stock is risky, and usually the only people who do it are well-educated investors who have done their homework. So when you have all the analysts on one side having a love fest with a particular stock, and an army of shorts sitting on the sideline betting the stock goes down, you should see a red flag – it almost always means there’s something wrong that no one is talking about. It’s not inside information; it’s just information the bulls would be more comfortable ignoring. But if you ignore it, you could get crushed.
Bottom Line: Big hype plus massive short interest equals sell.
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