What is a Short Squeeze?
If you’ve followed the markets at all over the past couple of years, you’ve probably heard of traders looking for a stock to short squeeze. But do you know what a short squeeze actually is? A short squeeze occurs when very specific conditions are met by a stock. First, the stock has to have a high short interest, which means there are a large number of short sellers who are shorting the stock. Second, the stock needs to undergo some unexpected buying pressure that sends the price higher. Finally, the short sellers need to decide to cover their position and exit their trade at a loss.
So to sum this up: a short squeeze is a sudden surge in the price of a stock that is caused by short sellers covering their position by buying more shares of the stock. This final step is the key to the stock squeezing. The short sellers need to be caught off guard and decide to cover their short positions. You can imagine the cascading effect that takes place when buyers are buying shares, while at the same time more buying pressure is added when short sellers buy up shares as well.
Is a Short Squeeze Good or Bad?
It depends who you ask! Obviously if you ask a short seller, they’ll tell you a short squeeze isn’t very enjoyable. If you ask a trader who timed the squeeze, you’ll likely get a different answer. A short squeeze is neither good nor bad for the underlying stock. Until 2021, short squeezes occurred rather organically in the markets. There was no social media coordination or effort to take down the hedge funds.
Which brings us to a controversial point with short squeezes: are coordinated squeezes bad? Well, the SEC will tell you it’s illegal. Coordinated short squeezes like we saw in 2021 led to tens of billions of dollars in losses for institutions. It even led to the liquidation of a hedge fund called Melvin Capital, which averaged a return of 30% to its investors from 2014 to 2020. Although they may have benefited millions of smaller traders, coordinated squeezes set a dangerous precedent that skews the natural balance of an efficient market.
What Was the Highest Short Squeeze?
If you can believe it, we are just 18 months out from the GameStop short squeeze and 12 months out from the AMC short squeeze. I don’t know about you but it seems like an eternity ago. In January of 2021, GameStop stock squeezed from about $5.00 to just below $500.00 per share in a matter of weeks. Later that year in June, AMC shot up from $10.00 to just over $70.00 per share in a few days. These two short squeezes were historic and have become the prototypes for social media squeezes.
Both were heavily influenced by users on Twitter and Reddit who had an agenda against hedge funds. They are why many traders look to a stock’s short interest before ever looking at its fundamentals. Many of these traders hold onto these shares with diamond hands, awaiting the next short squeeze. While these two stocks will forever remain linked to short squeezes, Reddit traders have managed to find some other targets to squeeze.
Can Stocks Squeeze in a Bear Market?
Absolutely! Just because buying pressure is lower, it doesn’t mean stocks can’t squeeze. In fact, while GameStop and AMC have been trending downwards, other stocks have been squeezing higher. Check out this chart that shows the latest squeezes from the first week of June:
Source: Chatterquant.com Short-Squeeze Alerts Feed
Top 10 Stocks That Could See a Short Squeeze
Redbox is a video game and movie rental company that has long fallen out of favor with consumers. This means it’s the perfect stock for meme stock traders to rally around. Redbox is in the midst of getting acquired by Chicken Soup for the Soul Entertainment.
Interestingly enough, just days after this Tweet was sent out, Redbox saw a short squeeze. From June 9th to 10th, Redbox gained more than 60% during two of the most bearish sessions of the year. This came following the release of the May CPI report where inflation had hit a 40-year high. On June 13th, the S&P 500 fell by 3.88% and the NASDAQ fell by 4.68%. Shares of Redbox surged by 15.68% on a day where nearly every constituent of the S&P 500 was well in the red. On June 14th, shares of RDBX came full circle and fell by 34% during the session. Redbox has a short interest of over 209%, so this has the potential to squeeze higher at any time.
Vinco Ventures (NASDAQ:BBIG)
Vinco Ventures is an American consumer goods and digital marketing company. It rose to meme stock fame in 2021, when it was discovered to have one of the largest short interests on the market. BBIG did have a couple of minor squeezes, and hit an all-time high of over $12.00 at its peak. Since then the stock has tumbled down to below $2.00 now. Vinco Ventures is a prime example of a meme stock that traders love for its short interest and not its fundamentals or business.
Mullen Automotive (NASDAQ:MULN)
Mullen Automotive is an American electric vehicle startup that is developing its FIVE crossover EV model. These vehicles should be ready for consumers in 2024, which makes Mullen a pre-revenue and not yet profitable company. The FIVE crossover won the award for the 2021 Zero Emission Vehicle Award for the SUV ZEV category at the Los Angeles Auto Show. This coincided with the stock surging to an all-time high price of $15.90. Since then shares have fallen to right around $1.00 per share presently.
Ateriian is an eCommerce company that labels itself as an efficient consumer product platform. It utilizes its AIMEE software system used machine learning to improve online sales and streamline logistics and business efficiency. The translation for all of this is that Aterian sells products on eCommerce marketplaces like Amazon. Aterian made it to the r/WallStreetBets discussion boards because of a short report. The CEO also publicly complained about naked shorters holding the stock price down. Well, that’s all Reddit traders needed to target Aterian for a short squeeze. Last August, shares of Aterian squeezed higher by 400% and in April of this year, it squeezed for another 100%.
Houston American Energy Corporation (NYSEAMERICAN:HUSA)
HUSA is a pretty simple company to understand by its name. It is an oil and gas exploration and discovery company. The company rose to fame in the stock market in March of this year. One look at the chart will tell you everything you need to know. On March 4th, shares of HUSA surged from $1.90 to over $16.00 in one session. It had some short interest, but it also happened to coincide with US investors speculating on higher domestic oil output. These two factors created the perfect storm for a HUSA squeeze.
Indonesia Energy Corp Ltd (NYSEAMERICAN:INDO)
INDO took investors on a wild ride earlier this year, right around the same time that HUSA also saw a squeeze. Shares of INDO rose from $13.50 to $86.99 in the span of a week. In the three months since, shares are trading back down at just under $8.00 per share. According to Fintel, INDO only has a short interest of about 13.49% now, which means investors might need to wait a bit longer to see another squeeze.
A stock that needs no introduction, AMC still regularly makes the list for stocks most likely to see a short squeeze. We are now a year removed from when AMC hit an all-time high closing price of $62.55. The stock is trading at just over $12.00 now with a short interest of 21.31%. A slew of Hollywood blockbusters in 2022 have kept AMC afloat, although the stock is still down by about 52% year to date.
Tonix Pharmaceutical Holding Group (NASDAQ:TNXP)
Tonix is a clinical stage biotech company that hasn’t exactly had the best year. The stock is down a staggering 95% over the past 52-weeks, and even though it has seen some mini squeezes, they haven’t lasted long. Tonix has made headlines for acquiring a patent approval for a Monkeypox vaccine. The company was also involved in the COVID-19 vaccine race over the past couple of years as well.
Carvana is an online used car retailer based out of Arizona. Shares of Carvana are down 90% so far in 2022 and 91% over the past 52-weeks. Carvana makes this list because it has a short interest of more than 30%, which has it on the radar of some Reddit trading groups. Carvana famously fired 2,500 staff earlier this year to cope with rising costs. At its peak, Carvana was trading at a 52-week high price of over $375, and now it’s just under $25 per share.
GameStop rounds out the list of the top ten stocks that could squeeze. We’ve seen a couple of minor bursts out of GameStop but nothing compared to January of 2021. The stock has somewhat stabilized although with a 24% short interest, it has the potential to squeeze at any time. Part of the problem for GameStop is that the stock might be too expensive for retail traders to buy up. The company is sorting that out by announcing a stock split that will be voted on by shareholders at the annual meeting in August.