The rapid rise in GameStop’s stock price has been called a short squeeze by most, but that’s not what’s happening, says a short-term and market expert.
Why it matters: That could mean that if and when the short squeeze comes, GameStop’s price could rise significantly higher than current levels.
What is going on: Short sellers have been piled into GameStop as a result of the rapid rise in the stock price, not the other way around, Ihor Dusaniwsky, director of predictive analytics at S3 Partners, told Axios.
- In the past year, the number of short stocks is up 12%, while the total number of dollars at risk is up 1,900%, S3 data shows.
- That’s a sign that big bets are coming from hedge funds and institutional investors, meaning the short squeeze hasn’t even started yet.
How it works: In a typical short squeeze, short sellers have sold the shares and “rented” shares with the intention of buying them after the stock price has fallen. But they are “squeezed out” if the price rises too much and they are forced to exit the trade by buying the stock at a higher price.
- That helps the value of the stock to rise as the short sellers join the momentum that drives the price higher.
- But with GameStop, every time a short seller exits the market and buys shares, new short sellers come in to replace them, maintaining the same downward pressure on the price and basically rising short-term interest rates.
What it means: “That tells me what moves the market is the long buyers. This is not a short coverage rally,” said Dusaniwsky.
- “If that were the case, I would see shorted stocks fall suddenly. For this kind of price movement, I should see short-term interest rates wiped out.”
- “One way I can see that short-term interest rates are not being wiped out is because equity loan interest rates are getting higher.
- “That means shorts don’t come off net.”