Short Squeeze Indicator - Is There One?
While talking about short squeeze stocks it should be noted that there is no real “indicator” as in an alert system software or anything like that right now. In fact, there is absolutely no telling when a short squeeze may be coming, which is why it’s so devastating to most short-sellers. Nobody can predict it. It can happen any time and any minute without any prior signs in the stock market performance.
On the other hand, there still are some indicators that tell the traders if a shorting position is justified on a specific company or not at a given time. Let’s look at some examples.
Let’s take Tesla stock in late 2019. Almost 18% of the entire Tesla stock was being shorted by individuals and companies alike. That is a HUGE number. All this meant that the market sentiment was extremely negative towards Tesla, and almost everybody was expecting the price to drop, just because of this factor alone. On the other hand, we got sort of an anomaly thanks to heavy-handed marketing from Elon Musk, and in fact, we got a sharp increase in price. This is actually a very good example of a short squeeze in general as well.
However, regardless of this one case, a large chunk of the company’s stock being shorted is a tell-tale sign that they are a goner. This is why a lot of people lose money during a short squeeze.
Short Squeeze Stocks List - Past, Present & Future
Short squeeze means that all of the people who had borrowed the shares in hopes that the stock will go down are now seeing an increase in the share price. It means that every extra cent in which the stock goes up is extra money the traders have to pay in order to get those shares back to the broker. And the worst part about a short squeeze is that it’s a self-fulfilling prophecy in a sense. Why? Well, as the stock price starts growing and some traders start panicking, they try their best to exit their positions. Exiting a short position means to buy the stocks you had sold previously and returning them to the lender. So basically, every short trader is forced to buy the stock they’re shorting, thus pumping the price growth even more. This is one of the reasons why most short traders jump out of the market at the first signs of price growth, as they know it’s going to have a snowball effect.
A short squeeze is not a new phenomenon, it has happened many times before and it will probably happen again in the future. Therefore, it is recommended that traders take a really good look at how these short squeezes happened, what were the major causes, and whether there’s a chance of it happening again but with other company stocks.
Tesla is probably the best example of a short squeeze. The time that it takes Tesla to break down its share price tends to be a lot slower than it takes to increase. One of the reasons for this is because Tesla is one of the most shorted stocks in the US stock market.
Tesla sometimes is considered to be the mother of all short squeezes. Since April 2020, there were 20 million shares being shorted and two months later there were 15 million shares. The process of the short squeeze in the stock market was continuing almost during the whole year. This is why a lot of people lost their money at this period of time. The overall amount of money that has been lost during this time reached 38 billion dollars which is an extremely huge number.
Here is what happened in GameStop’s short squeeze. After hitting an all-time low of $2.80 per share in April of 2020 GameStop quickly jumped to $325 per share in January 2021. Almost every hedge fund in the US was shorting this stock, so you can imagine how much damage they took. The stock jumped more than 100 times its lowest price so quickly, there was simply no surviving it. The year-to-date losses on the GME squeeze were around $6.7 billion dollars in total for hedge funds.
Another noticeable thing about this huge short squeeze is that it was like an anomaly in the stock market that has never happened before. Melvin Capital hedge fund decided to place shorting GME stock because they believe that their prices would go down. In fact, the GameStop stock prices did go down for some period of time; however, the Reddit community found out all about these and they started to buy GME stock all at once which caused a price increase in a very short period. All of this became the reason why Melvin Capital lost a huge amount of money eventually.
Herbalife is considered to have one of the most legendary short selling failures in the last decade. This short selling fail saw two hedge fund titans clash and nearly destroy each other: A multi-million dollar smear campaign; insider trading; and an FBI investigation. Bill Ackman's activist short of multi-level marketing firm Herbalife went down in the history books as one of the most disastrous shorts of all time.
Usually epic short selling fails tend to involve high-growth companies where stocks do not conform to traditional models of valuation. Herbalife short selling disaster centers around a multi-level marketing firm. What happened was that in late 2012, Bill Ackman released a research report accusing Herbalife of running a pyramid scheme. He had done extensive research on the company and was convinced that it was a fraud. After that he took a 1 billion position against the company. This eventually led to a drawn-out battle between him and another wall street titan that involved SEC, FBI and insider trading scandals.