A Short Squeeze is a widely known reason for short sellers to close out (buy to cover) their short positions when they incur large mark-to-market losses and\or stock borrow rates spike, but the other side of the coin is closing out a short position in order to realize mark-to-market gains. With the domestic stock markets down significantly in 2020, the vast majority of short trades are “in the money” and diligent traders are preparing exit strategies for their profitable short positions when the markets begin to trend upwards.
If these short sellers see their sizeable unrealized profits begin to get eaten away by a rebounding stock market, there is a good chance that they will start buying back shares to lock in their remaining profits. This would provide an additional boost to the stock’s price as they trade alongside long buyers on the bid side of the market.
We are looking at stocks with short interest that has averaged over $500 million since March 1st whose potential short covering will have an appreciable effect on stock price. The Profit\Loss includes stock borrow costs and mark-to-market profits and losses on daily short positions. The P\L% is simply Total Net P\L$ divided by Average Short Interest since March 1st.
With the market rallying today we may see short sellers buying shares in the following stocks and pushing stock prices even higher than if only long buying was taking place in the name. Sectors which were hit hard in the market downturn are represented in the top 25 and we see cruise lines (CCL), casinos (MGM & CZR), retailers (M, JWN & RH) and airlines (UAL, DAL & AAL) as some of the top short buying targets during a rally.
Looking at the other side of the ledger, there are also short stocks that are “normal” short squeeze candidates. These are shorts that have already incurred mark-to-market losses even in this market downturn that will perform even worse during a market turnaround. Stocks that performed well and were “losers” for the short side will be in line for a squeeze as shorts take on even more losses if a market rally truly takes hold.
Internet related companies such as CTX, ZM, TDOC, ZS, AKAM, JD & PDD should see short side buying as future losses mount. Other sectors that should see squeeze related buying are Consumer Staples (HRL, KR, GIS, CLX, CPB & SJM); Pharma and Biotech (MRNA, GILD, REGN, LLY, VRTX & SGEN); Retailing (WMT & DG); and Specialized REITS (DLR & EQIX).
Although there are fewer traditional “Short Squeeze” candidates in such a downward trending market, there are quite a few “Profit Squeeze” candidates. When the markets begin their recovery, there will be a slew of short covering by short sellers who are trying to lock in their mark-to-market profits or limit their losses.
These shorts will add to the buying demand of the dry powder in the market that is looking to buy off stock lows and will create an even steeper “hockey stick” price move in these more heavily shorted stocks. Buying a big short winner or big short loser today may prove to be an even bigger long buyer’s winner tomorrow.
Using our Black App an investor\trader can see a stock’s mark-to-market short Profit & Losses and add another metric to the long buying decision process.
Want deeper insight into the above analysis?
Contact: Ihor.Dusaniwsky@S3Partners.com
Managing Director Predictive Analytics, S3 Partners, LLC
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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decisions.
