Even stocks have made a comeback, with one big change: this time around, short sellers are not a big player in the market.
Individual investors have been preparing for several weeks to attack hedge funds that bet on their favorite stocks. In January, their strategy of banding together online to send a handful of stocks like GameStop Corp. “On the moon” allowed them to inflict heavy losses on their opponents with deep pockets and to win a victory over the pros of Wall Street.
In the latest episode of frantic trading in unlikely momentum stocks, there appears to be far fewer short squeeze opportunities. This is when stock prices start to rise, forcing bearish investors – usually sophisticated market players like hedge funds – to buy back stocks they had bet they would fall, to limit their losses. .
The number of outstanding shares that have been sold short, known as short interest, remains low from levels seen in January for popular stocks like GameStop, Clover Health Investments Corp.
and clean energy fuels Corp.
GameStop has remained very popular on Reddit’s WallStreetBets online forum since the first wave in January, and its stock has climbed more than 1,100% this year. Short-term interest represented about 17% of its outstanding shares as of June 9, down from 102% at the start of the year, according to data from IHS Markit..
For AMC Entertainment Holdings Inc.,
Another stock of memes that has jumped about 2,230% this year, the picture is cloudier. The number of stocks sold short increased, but the ratio to its outstanding shares fell to around 20%, after peaking over 24% in early January. The movie theater chain has sold more than 100 million shares since January and converted debt to equity, which has lowered the short-term interest rate.
Still, the data suggests that investors like hedge funds are not crowding into transactions by betting on falling stock prices even.
Analysts say what is probably driving the market this time around are call options. These are contracts that give buyers the right to buy a stock on a certain date and at a certain price. This type of security offers a profit to the buyers if the underlying stocks rise.
An increase in call options activity may force some participants to buy stocks, much like a short squeeze. But instead of trapping bearish investors, the increase in call option activity is pushing market makers such as banks to buy stocks to cover their positions. This is because the sellers of call options are obliged to deliver these shares if the contracts are exercised.
Investors like hedge funds could buy certain stocks in an attempt to trigger this phenomenon, known as gamma compression, said Helen Thomas, founder of Blonde Money, a UK-based financial research firm. Some individual investors also trade options and post screenshots of their positions on the Reddit forums.
However, while this type of squeezing can speed up the ascent, it can add juice to the drop in a title as well.
“It is done in two ways: It creates crises, but if these stocks start to trade lower then the dealers sell,” said Charlie McElligott, multi-asset strategist at Nomura Holdings..
“It creates these crash-up, crash-down cycles.”
Many Reddit users show no signs of worrying that the upward trajectory of memes stocks could be suddenly reversed. Clover Health has become a favorite in recent days for those determined to stage another battle against hedge funds, pushing its stock up about 67% this week.
“$ CLOV is the perfect setup for an epic short squeeze,” a user called u / mamagpepper wrote on WallStreetBets on Wednesday, referring to the Clover Health ticker. Clover Health recently had around 10% short interest.
This time around, short sellers can be more careful before taking on retail traders, whose bets typically ignore metrics like the outlook for profits and sales.
“Hedge funds are afraid of holding large short positions [in meme stocks], although fundamentally it makes a lot of sense, ”said Lorenzo Di Mattia, Chief Investment Officer of Sibilla Capital. “AMC stock is probably worth $ 10, but that doesn’t mean it’s going to get there any time soon. With the retail army knowing nothing about the valuation, the risk is much greater than normal.
AMC closed at $ 49.40 on Friday.
Individual investors do not necessarily target their efforts on the shortest stocks.
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Bed bath and beyond Inc.,
which gained popularity in January, has short-term interest of about 31% of its total assets, according to IHS Markit. But the action has largely lost its luster on WallStreetBets since early 2021 and was not among last week’s most popular actions, according to TopStonks.com, which tracks the actions mentioned on Reddit. Shares of the retailer have risen about 80% this year.
Meanwhile, the potential for some stocks to drop precipitously even makes bearish bets more tempting for some investors.
Mr. Di Mattia de Sibilla weighs in by betting on the loss of value of AMC shares.
“If it’s like GameStop in January, it could double again before it crumbles: that’s why it’s hard to cut short,” he said.
Write to Anna Hirtenstein at [email protected]
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