What is a Short Squeeze?
A short squeeze occurs when stock skyrockets rapidly, causing short sellers (traders who borrowed shares to bet on a stock to go down) to be forced to “buy-to-cover” (close the bearish position) to limit their losses. Short squeezes, in particular, are powerful because of the unique dynamics and dangers of short-selling. When an investor buys shares in a stock, the most they can lose is 100% (if the stock goes to $0). Conversely, when a short-seller shorts a stock, the lost potential becomes unlimited, theoretically. Stubborn short-sellers can hold onto bearish positions for a while, but eventually, a rising share price acts as a self-fulfilling prophecy and snowballs on itself to force shorts out of the trade.
How to Find a Short Squeeze
Short squeezes can be a valuable set up to add to your investing toolbox. First, because most short squeezes have the same or similar attributes, they can be easily identified (with practice) and added to your process because they are repeatable. Second, short squeezes can be beneficial to those investors who have difficulty with patience because, right or wrong, the feedback loop is very rapid. Below are five attributes I look for in a short squeeze, including:
1. High Short Interest: Seek stocks with a short interest of 10% or higher.
2. Small Float: Like a speedboat can move faster than a tanker or cruise ship, a small float stock can move faster than a large cap.
3. Bullish Catalyst: Unexpected bullish catalysts add fuel to the fire and force short sellers to cover.
4. Price Gap Out of Base: A price gap out of a base structure illustrates that something has materially changed in the company and confirms a trend change,
5. Relative Volume Explosion: The best short squeezes have a massive volume footprint that confirms accumulation.
Short Squeeze Example: CRNC
I thought of writing this piece is that I was lucky enough to catch a short squeeze in Cerence (CRNC) today. Below is a real-world example of today’s CRNC short-squeeze
1. CRNC Short Interest was a hefty 17% into today’s market open.
2. With a float of just ~42 million shares, CRNC is built to move.
3. CRNC, a leading AI technology provider for the automotive and mobility industries, announced that it inked an expanded collaboration with the undisputed AI leader, Nvidia (NVDA).
“Professional Gap” & Volume Stampede
A fantastic way to look for short-squeeze opportunities is to monitor stocks with overnight news spiking. CRNC gapped up more than 30% on the NVDA news as volume swelled thousands of percent above the 50-day average. Though a 30% move might seem overdone to the amateur investor, the stock is up more than 100% at the time of this writing.
Image Source: TradingView
Don’t fret if you missed CRNC. New, high growth industries like AI will provide more of these opportunities. In fact, earlier today, Microsoft (MSFT) announced that it will spend a mind-boggling $80 billion on AI data centers this year.
Bottom Line
Short squeezes are one of the most rewarding set ups. Luckily, investors can learn the ingredients behind these breathtaking moves with some studying.
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