Latest Business News
Short Squeeze Frenzy: Another Wave of Squeezes Could be Coming
Market Indicates Potential for Another Short Squeeze
According to Trivariate Research, the number of stocks among the top 3,000 U.S. companies with 20% of their outstanding shares sold short has reached record levels, surpassing even the meme stock craze of 2021. Although some of the short squeeze may have already taken place, as 22% of heavily-shorted stocks have seen at least a 50% increase in value over the past three months.
The Mechanics of a Short Squeeze
Short selling involves borrowing shares of a stock and selling them in the market. The goal is to buy back the borrowed shares at a lower price in order to profit from the price difference. However, when the stock's price rises instead, short sellers are forced to buy back shares at a higher price, leading to a short squeeze. This process further drives up the stock's value.
Current State of the Stock Market
Overall, the stock market has been experiencing a strong rally due to easing inflation pressures and the Federal Reserve's nearing the end of its rate-hiking campaign. The Dow Jones Industrial Average has seen its longest rally since 2017, with 11 consecutive up days. The S&P 500 has also performed well, gaining over 18% this year and achieving its best first half since 2019.
Potential Impact on the Broader Market
While heavily shorted stocks have been performing well in the current rally, it is important to note that not all heavily shorted stocks experience a significant squeeze. Adam Parker, founder of Trivariate, highlights that there have been periods with a similar level of heavily shorted stocks that did not result in a sharp rise and subsequent disruption of the broader market.
Current Candidates for Short Squeezes
Currently, Allogene Therapeutics tops the list of most shorted stocks, with approximately 50% of its shares sold short. Other heavily targeted stocks include Carvana, Novavax, Lucid Group, and Beyond Meat. These stocks have drawn the attention of short sellers, potentially setting the stage for a short squeeze in the near future.
Conclusion
In today's stock market, the potential for another wave of short squeezes looms large. The record levels of heavily shorted stocks among the top 3,000 U.S. companies indicate that there could be more opportunities for investors to drive up stock prices and force short sellers to cover their positions. However, it's important to approach this frenzy with caution and consider its potential impact on a new business.
Short squeezes can generate significant volatility and disrupt the broader market. While heavily shorted stocks have been performing well in the current rally, it's not guaranteed that all heavily shorted stocks will experience a significant squeeze. There have been periods with a similar level of heavily shorted stocks that did not lead to a sharp rise and subsequent market disruption.
For new businesses, this short squeeze frenzy can be both an opportunity and a challenge. On one hand, if a new company finds itself on the list of heavily shorted stocks, a potential short squeeze could drive up its stock price and attract more investors. This can provide much-needed capital and raise the company's profile. On the other hand, if the market sentiment turns and a short squeeze fails to materialize, the company's stock price could suffer, potentially affecting its ability to access additional funding or attract new customers.
Therefore, new businesses need to carefully assess the risks and opportunities associated with short squeeze scenarios. It's essential to have a solid business plan, strong fundamentals, and a market strategy that can withstand market fluctuations. By staying informed and having a clear understanding of the dynamics at play, new businesses can navigate the potential impact of short squeezes and position themselves for success in this evolving market landscape.
Article First Published at: https://www.cnbc.com/2023/07/24/the-market-is-going-through-a-short-squeeze-of-historic-proportions-even-bigger-than-the-meme-craze.html.svg)
