GameStop’s short sellers are on the run. They may want bulls back.

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The short press that helped drive

GameStop

The parabolic run of stock loses steam. Investors must be careful.

GameStop

stock (ticker: GME) fell 42% to $ 129.98 Tuesday morning. The stock fell to $ 74.22 but rebounded a bit when Robinhood eased its stock buying restrictions a bit. Meanwhile, data from short-selling analytics firm S3 Partners indicates that the stock’s sky-high short stakes have returned to Earth.

Ihor Dusaniwsky, general manager at S3 Partners, said Barron’s on Tuesday that only 26.09 million GameStop shares were recently short sold, or about 51% of the shares available for trading. That’s down more than 35 million shares in the past week alone, implying that last week’s rise was partly driven by large-scale short coverage.

Taking into account so-called synthetic longs, which are long positions that can be double counted as a result of the short-selling process, S3 estimates an adjusted short interest of only about 34% of the stocks available for trading. When an entity lends its shares to a short seller, the short seller then sells to a new owner. Technically, both the original holder and the new buyer are long, despite no new shares being created. Dusaniwsky says adapting to this process provides a more logical and accurate view of short-term interest rates.

While short-term interest has been a regular part of the GameStop short-squeeze phenomenon, increasing the share of the video game chain as negative bets are made, there is another side to that phenomenon. It can cause problems for bulls “if you drive the short end of the market,” said Steve Sosnick, chief strategist at Interactive Brokers.

“One of the things that shorts do on the way down, they provide a little bit of support because they tend to take a profit,” buying stock, Sosnick said. Barron’s in an interview last week. “If you push out all the shorts, and then something goes down, there’s less in the way at the bottom.”

Abnormally high short-term interest rates can be a bullish sign, as was shown in the case of GameStop, as shorts should ultimately provide coverage, Sosnick said. On the other hand, very low short-term interest rates can be a bearish sign.

“We already had quite a low short-term interest rate in the market as a whole and this is really going to put a number on the shorts,” added Sosnick, referring to last week’s rally in high-short stocks like GameStop,

AMC Entertainment,

and Bed Bath & Beyond. So, you know, it really has to cut down on the short-term interest out there. Once they cover themselves, and not because they want to, but because they have to, who is left? Who is the marginal buyer at that time? “

On the WallStreetBets Reddit forum, the GameStop movement’s de facto hub for retail investors, users urge each other to buy the dip and stick to existing long positions. But at least one notable investor has not heeded that advice.

Barstool Sports founder Dave Portnoy said Tuesday that he has sold all of his “meme shares” – which have gone viral on social media and go far beyond reasonable valuation statistics. Portnoy’s message angered people who said those stocks could still go up, though he noted he lost about $ 700,000 in such names.

Gary Black, who was a leading tobacco analyst for Bernstein in the 1990s and the former CEO of Aegon Asset Management, said on Twitter he believes the squeeze is “far from over, as hedge funds that went short offset their positions, and other hedge funds as long as the squeeze focused on other trades.” Black is also active on

Twitter

talk about electric vehicles.

Dusaniwsky calculates that people who have already borrowed GameStop stock and sold it short pay a 19% loan fee, but he notes that such rates “ease significantly as the lending pool is replenished as buy-to-covers stock loans become available.” He sees new stock borrowing costs in the 10% to 20% range. Higher fees are one of the drivers of short sellers to hedge their positions.

Write to Connor Smith at [email protected] and Avi Salzman at [email protected]