The meteoric rise in GameStop’s stock price is being called short squeeze by most, but that is not what is happening, says an expert on short interest and the market.
Why does it matter: This could mean that if and when the squeeze comes, GameStop’s price could rise significantly higher than its current levels.
What is happening: Short sellers have accumulated at GameStop as a result of their meteoric rise in share prices, and not the other way around, Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, told Axios.
- Last year, the number of shares sold short increased by 12%, while total dollars at risk increased by 1,900%, data from S3 show.
- This is a sign that big bets are coming from hedge funds and institutional investors, which means the tightening hasn’t even started yet.
How it works: In a typical short purchase, short sellers sold the shares and “rented” shares with the intention of buying them after the price dropped. But they are “squeezed” if the price goes up too much and are forced out of the trade by buying the shares at a higher price.
- This helps the stock’s value to rise because short sellers join in the momentum by pushing the price up.
- But with GameStop, every time a short seller leaves the market and buys shares, new short sellers are coming in to replace them, maintaining the same downward pressure on price and, in fact, short interest is increasing.
What does it mean: “It tells me that what is driving the market is long-term buyers. This is not a short-term coverage rally,” said Dusaniwsky.
- “If it were, I would see the shares sold dropping precipitously. For that kind of price movement, I would have to see the shares sold being eliminated.”
- “One way to see that short interest is not being eliminated is because the stock lending rate is getting higher.
- “This means that short positions are not coming out on a net basis.”