Thread by @StockWonk

A common retail myth that is perpetuated on social media, Reddit, WSB, Twitter, and other places is that high short interest and Failures to Deliver will lead to massive short squeezes. This is simply false, and misleads retail investors into becoming bagholders. A thread ... /1

The problem with this idea is that high short interest alone is insufficient to "squeeze" a stock. For a stock to experience a significant short squeeze, shorts need to be in a disadvantaged position. They need to be "trapped." /2

For example, if there are lot of overaggressive shorts who are in at a lower price, then a bunch of buying may cause a short squeeze as those shorts are then forced to cover as the price goes up. /3

This can cascade as new shorts come in (such as day traders) to try to pick a top, only to be forced to cover. A stock starts to generate momentum on its own. This can continue until early shorts are squeezed out and buyers become exhausted. /4

Some shorts may try to average up on their positions, only to be forced to cover as they become overleveraged or margin called. This can sometimes result in a "blowoff top" where shorts exceed max pain /5

However, for this to all happen, SHORTS NEED TO BE STUCK. They need to be in at lower prices, and/or the liquidity needs to be low enough to where they can't cover without significantly forcing the price up /6

In fact, sometimes the "days to cover" variable can be a sign of how much liquidity is there for shorts to cover. If trading volume is too low, there isn't enough liquidity and covering shorts could possibly force the price upward significantly /7

But if liquidity is high, and/or shorts are not "stuck" at lower prices, then HIGH SHORT INTEREST IS MEANINGLESS. In fact, if you look at the scientific data, high short interest usually predicts lower, not higher, stock prices /8

A perfect example of this is what I tweeted a bit earlier...$RDBX, a retail favorite for high short interest, has shown a massive decrease in short interest. If covering shorts were all you needed to cause a squeeze, the price would've gone up, not down.

https://twitter.com/StockWonk/status/1546967799548915712

What really matters in trading is who is "stuck". High short interest doesn't tell you much regarding this. You can have high short interest but it could be all the longs who are "stuck" at higher prices, meaning the price will just continue to fall as it gets more painful... /10

Thus, be careful of the misinformation spread on social media regarding short interest and FTD's. They usually don't mean much when it comes to whether you're in a high probability trade. /end