Far fewer GameStop shares are sold short than a week ago.
CHRIS DELMAS/AFP/Getty ImagesThe short squeeze that helped drive GameStop stock’s parabolic run is losing steam. Investors should be cautious.
GameStop stock (ticker: GME) was down 42% to $129.98 late Tuesday morning. The stock fell as low as $74.22, but rebounded a bit as Robinhood loosened restrictions on share purchases a bit. Meanwhile, data from the short-selling analytics firm S3 Partners signals the stock’s sky-high short interest has come back to Earth.
Ihor Dusaniwsky, managing director at S3 Partners, told Barron’s on Tuesday that only 26.09 million GameStop shares were recently sold short, or about 51% of shares available for trading. That’s down by more than 35 million shares over the past week alone, implying last week’s surge was driven in part by large-scale short covering.
If you factor in 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 shares available for trading. When an entity loans 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 adjusting for this process gives a more logical and accurate look at short interest.
While short interest has been a fixture of the GameStop short-squeeze phenomenon, causing the videogame chain’s shares to rise as negative bets are closed out, there’s another side to that phenomenon. It can cause problems for bulls “if you drive out the short side 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 support, because they tend to take profits” by buying shares, Sosnick told Barron’s in an interview last week. “If you drive all the shorts out, and then something goes down, there’s less to stand in its way on the downside.”
Abnormally high short interest can be a bullish sign, as it proved to be in GameStop’s case, since shorts eventually need to cover, Sosnick said. On the flip side, very low short interest could be a bearish sign.
“We were already at pretty low short interest in the market as a whole and this is gonna really do a number on the shorts,” Sosnick added, referring to last week’s rally in highly shorted stocks like GameStop, AMC Entertainment, and Bed Bath & Beyond. “So, you know, it’s got to really shrink the level of short interest out there. Once they cover, and not because they want to, but because they have to, who’s left? Who’s the marginal buyer at that point?”
On the WallStreetBets Reddit forum, the de facto hub of the GameStop retail investor movement, users are urging each other to buy the dip, and to hold on to existing long positions. But at least one notable investor has not heeded that advice.
Barstool Sports founder Dave Portnoy said Tuesday he’s sold all of his “meme stocks”—those that have gone viral on social media, rising well beyond reasonable valuation metrics. Portnoy’s post drew ire from people who say those stocks can still rise, though he noted he lost roughly $700,000 on such names.
Gary Black, who was a leading tobacco analyst for Bernstein in the 1990s and the former chief executive of Aegon Asset Management, said on Twitter he believes the squeeze is “all but over as hedge funds who shorted offset their positions, and other hedge funds long the squeeze are onto other trades.” Black is also active on Twitter talking about electric vehicles.
Dusaniwsky calculates people who have already borrowed GameStop stock and sold it short are paying a 19% borrowing fee, but he notes that such rates are “easing significantly as the lending pool is being replenished as stock borrows from buy-to covers become available.” He’s seeing new stock borrow fees in the 10% to 20% range. Higher fees are among the motivators that drive short sellers to cover their positions.
Write to Connor Smith at connor.smith@barrons.com and Avi Salzman at avi.salzman@barrons.com
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GameStop's Short Sellers Are Fleeing. Bulls May Want Them Back. - Barron's
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