A Short Squeeze Could Save GameStop Investors A Third Time

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GameStop announced its fiscal first quarter results on Wednesday along with a new CEO and CFO from Amazon AMZN and a 5 million share offering where the company can sell shares anytime. From a short-term stock perspective the stock offering is the most important as it cratered the shares $82.17 or 27% from $302.56 to $220.39 on Thursday. While this knocked off almost $6 billion in market cap, the company is still worth almost $16 billion.

This is the third time this year investors have lost billions of dollars in a few days. Anyone who bought GameStop shares and held them during the past 10 trading sessions are now underwater, some of them by over $100 per share.

It took one to three months to recover from the two previous selloffs this year and the shares only spent a handful of trading sessions each time at or close to the previous highs before the shares were sold off again. It could take another short squeeze for them to recover a third time.

Short squeeze analysis

Ihor Dusaniwsky at S3 Partners tracks stocks short interest in real time, and he posts a number of his charts and analysis on Twitter. Dusaniwsky has developed a Short Squeeze score and ranks GameStop’s a 100 out of 100 for a short squeeze. This signifies that a stock has a high potential for a short squeeze, dependent on its upcoming stock price movement. Note that his scale had previously been from 1 to 10.

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The number comes from an algorithm he created and is not subjective. Some of the factors in it are short sale liquidity, trading liquidity, financing liquidity and mark-to-market profit and losses. He wrote in an email, “A security is considered “crowded” on the short side if some or all of the following occur:”

  • There is a large amount of dollars at risk on the short side (high short interest)
  • There is a large proportion of a security’s tradable float shorted (high S3 SI % Float)
  • There is scarcity of stock loan supply (high stock borrow fees)
  • There is limited daily trading volume (high days to cover)

However, even when these criteria are met it does not necessarily mean the stock is a short squeeze candidate. Dusaniwsky added, “While a stock can be “crowded” it might not necessarily be a short squeeze candidate. An additional variable, which is necessary for a short squeeze to occur, are substantial net-of-financing mark-to-market losses.”

He continued, “A short position, no matter how crowded, that continues to be profitable cannot be squeezed. No trader will be forced to exit a position that continues to be profitable. Mark-to-market losses are the primary impetus for a Short Squeeze to occur.”

Large losses could lead to a short squeeze

Dusaniwsky calculates that there continues to be moderate short covering in GameStop with short sellers covering 685,000 shares, worth $207 million, over the last 30 days. This is a 5.8% decline in shorted shares as the stock rallied 111%.

Most of that short covering occurring over the last week with 677,000 shares bought-to-cover, worth $205 million. This is a decrease of 5.7% in shorted shares, while the stock rose 7%.

Using Thursday’s stock price of $220.39:

  • GME short interest is $3.4 billion vs. $2.99 billion on Monday
  • And vs. a $17.6 billion market cap
  • 11.23 million shares are shorted
  • 19.41% Short Interest percent of float
  • Shorts are still down $6.5 billion in year-to-date mark-to-market losses
  • Even after gaining $923 million on Thursday’s decline of 27%
  • Shorts are down $16 million or 0.5% in June

As outlined above, it is the $6.5 billion in losses this year that could create a short squeeze on GameStop’s shares.