StockWonk Profile picture
Jul 12 11 tweets 2 min read
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.
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

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More from @StockWonk

Jul 1
A must-read thread on important lessons for retail and newbies who fall for a lot of myths surrounding stocks, particularly retail-heavy meme stocks like $AMC $GME $RDBX $REV etc...if you're retail, then read this /1
1. Shorts can't drive a company into bankruptcy, no more than longs can drive a company into profitability. Bankruptcy is when a company becomes insolvent due to its debt/obligations dramatically exceeding its income/assets. Shorts have zero impact on this /2
2. These meme stocks are zero sum games. If you're going to win, someone else has to lose. Encouraging a bunch of retail to pile in to "squeeze the shorts" in fact usually causes a bunch of retail to lose money as it's just retail pumping & dumping on each other. /3
Read 19 tweets
Dec 30, 2021
Imagine a poker game. Imagine all the players putting their money in the pot, but only one player wins that money. It's a zero sum player wins, but the rest lose. A thread 1/
Now, imagine a referee for that poker game. His fee is to take money from the pot during each round. The game is now no longer zero sum for the's negative sum for the players because the amount of money that is available to the players to win is less than put in /2
There will still be a winner in each game, but even though there's a winner, it's overall negative sum for the group of players involved. And for any person to keep making money, you have to recruit new players to play since some players will eventually lose their money /3
Read 12 tweets
Dec 13, 2021
Yesterday I posted a thread on why Bitcoin's upside is limited (greater fool asset, energy consumption). I want to expand on the greater fool aspect, and the comparison I made to MLM schemes /1
Market saturation is the point at which all the people who want the product at the desired selling price will purchase. No product or service will achieve 100% market penetration, since not everyone will want the product or be able to afford it.… /2
Even the most successful product will only achieve partial market penetration. Once the market is saturated, no one else will buy the product unless the price is lowered. /3
Read 11 tweets
Dec 12, 2021
In a recent excellent thread by @coloradotravis on how crypto is the financialization of belief, I saw people respond with claiming Bitcoin has "unlimited upside." This isn't true. The upside is very limited, giving Bitcoin a very poor risk/reward profile. A thread /1
@coloradotravis First, Bitcoin is purely a greater fool asset. While it may not technically be a ponzi, it has the same structure in that it is 100% dependent on inflows of new investor money to pay out early investors. Unlike the stock market, there are no other sources of inflows /2
The problem with any pure greater fool asset is that you eventually run out of fools who are willing to buy at higher prices. This alone caps the upside 3/
Read 14 tweets

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