In general, short squeezes are precipitated by large mark-to-market losses due to upward price movements of the shorted stock and\or high stock borrow financing rates which make it unprofitable to stay in trades for long periods of time.
Squeezes can be stock specific or sector specific depending on whether the price action is limited to one particular stock or a broad swath of securities within a sector.
There are several stocks that are in the grips of a stock squeeze or a candidate of a stock squeeze.
Tesla (TSLA) continues to be squeezed with $1.9 billion worth of shares shorted executed over the last week. -$20 billion of year-to-date net-of-financing mark-to-market losses and -$2.5 billion of mark-to-market losses over the last week have shaken out many of the shorts with less conviction of the stock’s price driving over a cliff. Short covering has turbocharged some of Tesla’s recent price moves and should continue to push prices up as more shorts cover their exposure.
Nikola (NKLA) differs from Tesla not only in the type of vehicle they will produce but also in the stock borrow rates that shorts are getting charged. Stock borrow rates on existing shorts are over 600% fee per annum and shorts are paying $10 million per day in stock borrow financing costs. Stock borrow rates are nearing 1,000% fee on new smaller transactions. Shorts are down over -60% for the year and the red numbers continue to grow with -$75 million in mark-to-market losses over the last week. With stock borrow availability pretty much used up and recalls hitting the street, shares shorted will continue to decline – there will be no NKLA short selling in size in the near term so any downward stock pressure will be from long selling and not short selling.
The surge in Moderna’s (MRNA) stock price has produced almost -$1.5 billion of mark-to-market losses for short sellers this year and its recent spike added -$537 million in mark-to-market losses over the last week. Shorts have been taking their medicine and continued to short into this rally with +$157 million of new short sales over the last week but continued losses may outweigh their overbought price conviction and force shorts with lower loss limits out of this trade. There is $2.4 billion of buy-to-cover dry powder in this stock, once shorts begin to cover in size the buying pressure will jolt the stock price suddenly higher.
Hanesbrands (HBI) is not just an undergarments company but is now selling masks to battle the Covid-19 pandemic so now you can wear Hanes head-to-toe. Shorts are still up +$113 million in mark-to-market profits for the year but have lost over half their yearly profits last week as HBI’s rally cost shorts -$139 million in losses. If HBI’s price strength continues shorts may begin to cover their positions in attempt to realize some of the gains they earned in early 2020.
Virgin Galactic (SPCE) shorts are down -$215 million in mark-to-market losses for the year but most of that loss was incurred over the last month as SPCE’s stock price hit the booster rockets. Shorts are down -$134 million in mark-to-market losses over the last month. Short selling has leveled off recently as its price strength has cooled short activity. This has been a losing trade for all of 2020, shorts will begin to exit as their losses increase and stock borrow rates stay or increase from their 10% fee levels.
Roku Inc (ROKU) shorts went from a profitable to losing trade over the last week with shorts down -$226 million in mark-to-market losses pushing shorts into a -$80 million mark-to-market loss for the year. ROKU short selling was still strong last week, with $84 million of new short selling, increased losses will at least curtail new short selling and can force existing shorts to look for more profitable trades elsewhere.
In addition to single name short squeezes we are also seeing sector wide short squeeze candidates. As you can see, these are sectors which were dramatically affected by the Covid -19 lockdown earlier in the year and are now showing signs of rebounding.
Cruise line stocks have been spiking recently and short sellers have given back more than half of their prior year-to-date gains over the last week. We are still seeing new short selling in Carnival (CCL) and Royal Caribbean (RCL) over the last week but are already seeing short covering in Norwegian (NCLH). As upward price moves keep eating into year-to-date short profits we will start seeing active short covering in all three names, especially in CCL as there are still year-to-date short profits to realize and a 11.34% stock borrow fee that makes keeping open short positions relatively expensive.
Airline short sellers are having a great year, but their recent stock price surge has lowered year-to-date profits by -19%. Shorts are already beginning to cover in Delta Airlines (DAL), and I would expect shorts to begin covering in American (AAL) and United (UAL) after being down over -11% over the last week.
Casino stocks were down for the year as gamblers were in lockdown mode, but their recent openings have spurred a rally in the stocks. Shorts have given back just over 25% of their mark-to-market profits over the last week but we are still seeing new short selling in all these securities as short sellers believe a smooth path to casino openings is a longshot. If casinos can keep gamblers at their tables and their stocks continue to climb expect shorts to begin to fold their cards and look for a hotter deck elsewhere.
Cannabis short sellers have given back over half their year-to-date mark-to-market profits over the last week and we are starting to see short covering in Canopy Growth (CGC & WEED CN) and Aurora Cannabis (ACB). The continued whisper of an Aphria (APHA) and Aurora Cannabis (ACB) merger may push stock prices up higher in the sector and push some shorts out of their trades.
With the market continuing to rise there will be more short squeezes as short sellers buy-to-cover and look to realize the profits they have earned earlier in the year. But if the market, or sectors, plateau and start to give back some of their overbought or momentum profits, expect short sellers to jump back into the deep end.
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.
Click for 10 Day Complimentary Access to Bloomberg/S3 Black App Pro
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.