Equity short squeezes can come from an accumulation of mark-to-market losses and\or high stock borrow costs which eat up an unacceptable amount of expected Alpha. Looking primarily at the mark-to-market losses I have combed over the nearly 14 thousand domestic stocks with short interest to see which stocks are short squeeze candidates. In my analysis I am looking at stocks with over $100 million of total short interest to include only stocks where the short covering from a squeeze can materially affect stock prices. Below are the top ten stocks by market cap with the largest weekly mark-to-market % losses, mark-to-market monthly % losses over -20% and stock loan borrow rates over 7% fee.
We have seen limited short selling into QuantumScape Corp’s (QS) recent rally with an increase of $7 million of new short sales over the last week, but if the rally continues, we should see short covering as short sellers’ mark-to-market losses mount. Another stock with increased recent short selling is Lemonade Inc (LMND) with $58 million of net short selling over the last week. If LMND’s stock price continues its December rally we expect the recent short selling to turn into short covering as mark-to-market losses start squeezing short sellers.
Stocks already in a short squeeze are Curevac NV (CVAC) with $24 million of short covering over the last week, an -18% decrease in shares shorted, and Blink Charging Co (BLNK) with $10 million of short covering , a -5% decrease in shares shorted.
Stocks with large recent mark-to-market losses, but stock borrow fees which are not overly onerous may also be subject to short squeezes. If these losses get large enough shorts will start buying-to-cover as they hit loss limits and look for greener pastures to short.
While recent mark-to-market losses do not always lead to short squeezes because some short seller’s strong short-side conviction will let them wait out their recent losses on the way to large expected short-side Alpha, there are many short sellers who will get a tap on their shoulder from their risk managers and told to exit losing positions. When short sellers begin covering in size, these stock’s recent rallies will get a boost as short buy-to-covers join long buyers in bidding up stock prices.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
Research Note written by Ihor Dusaniwsky, Managing Director of Predictive Analytics, S3 Partners, LLC
For deeper insight into short side data and analysis contact me at Ihor.Dusaniwsky@S3Partners.com
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