Massive short squeeze in GME, does short interest still work?

Hi,

GME has one of the highest short interests. And it’s no doubt a fundamentally poor company, but the stock rose 5X in 2-3 weeks.
Is the short interest ratio still predictive of returns? Either positive or negative.?

The 400 most shorted stock annualized 57% a year over the past 5 – including 175% last one year.

I’m not sure GME is a typical example of a highly shorted stock given the unusual manipulation?

Anyway, I stumbled upon this paper recently - I found it interesting. A quote from the beginning:

“The average level of shares shorted has rapidly increased over recent years. This phenomenon has been related to an increase in capital devoted to arbitrage strategies but also to the expanded use of short selling for market making and hedging activities. An increase insupply of lendable stocks is driven by the growth of institutional ownership (Lewellen,2011).”

Hasn’t worked over the past year. Here’s what the last year looked like using a measure of short interest that I use (combo of % of float, days to cover).

I remember an interview with Jim Chanos saying it’s been a bad year with most things going against him.


That said, despite short interest’s poor performance over the past year in isolation, its usefulness may be context dependent. When I tested one of the main screens I utilize now, it worked better over the past year with short interest included in the ranking system than without. ymmv.

Pretty wild times in the market right now. Feels like the r/wallstreetbets have turned the market into one big massively multiplayer online role-playing game. Huge organized clans of online retail investors ( r/wallstreetbets currently has 1,888,019 members. ) going on “gold raids” piling into the most shorted stocks to create a short squeeze and/or pumping penny stocks. I don’t know you prevent this stuff. Feels like there is no going back. Some of these people will end up as bagholders, but a lot won’t.

This might be the biggest short squeeze in US market history.

https://twitter.com/biancoresearch/status/1353341786480136192

Huge breakouts in penny stocks.

https://twitter.com/Callum_Thomas/status/1353071982254805003

This is a pretty good explainer about what is going on right now…

https://www.epsilontheory.com/off-wall-street-and-off-off-wall-street/#.YA7Bs0JKZCE.twitter

Just out of curiosity, built a quick RS which is 90% highest short interest and 10% the old P123 basic quality rank against a Russel 3000 universe minus Finance and Utilities. Grabbed ~10 names and pulled them up in a watchlist to see how they were doing today…this is pure unadulterated gambling going on at massive scale in the markets.



Taking out all quality and just pulling the most shorted names in the Prussell3000 universe. (It’s even worse if you focus on consumer cyclicals and non cyclicals). These short squeezes are just killing the hedge funds.


HedgeFunds.JPG

Short interest is a positive factor if gdp and inflation is up on relative terms for the quarter.
https://app.hedgeye.com/insights/94460-the-gme-squeeze-hedgeye-vs-citron?type=stock-and-policy%2Cmarket-insights
https://app.hedgeye.com/insights/94227-mccullough-look-out-for-short-squeezes?type=macro%2Chedgeye-tv

And yes, hedge funds get killed!
And yes, if gdp and inflation turn around, then high short interest = short and then all those hedge funds (that survived) will make money again…

So it depends on the market regime, I was hesitant to get more discreationary like Marc suggested, but he is right!
Get a ton of systems with different factors and use them to get a price signal on what works right now, see if you get confirmation
on gdp, inflation, fed policiy, political policy and then ride the waves (which seem to get shorter more volatile…)

Regards

Andreas

Apparently gamma scalping is a thing now. But some of the names on the first list are OK, like PETS. Since I’m in the options market, I looked at some data for the other stocks and for IRBT, MSGN and ZYXI I didn’t see unusual option activity - per my idiosyncratic definition. I make daily scans.

Walter

Apparently an index that tracks the “the short term performance of r/wallstreetbets and other trading subreddits” is up 916% since January 1st 2020.

https://twitter.com/marketstream_io/status/1353455701524242432

Matt LeVine on Gamestop…

https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops

Speaking of LeVine, this is an interesting prediction from a year ago…


EsmW4asWMAUnmda.png

Time for another $2.75B infusion? Ha!

https://www.bloomberg.com/news/articles/2021-01-25/citadel-point72-to-invest-275-billion-in-melvin-capital

This is the craziest thing Ive ever seen in the market, including the dot com bubble. This isnt just a typical pump and dump or bull market euphoria. This is a different type of mania. Its like occupy wall street on the financial sectors home turf. The hedge funds are about to flex a lot of muscle on the SEC to limit the type of trading retail investors have access to

This is a good explainer of the gamma squeeze phenomenon. This is different from the bygone eras of daytrading fads because of the new no commission option trading available to retail investors. Retail investors can now collectively move markets.

https://www.bloomberg.com/news/newsletters/2021-01-26/five-things-you-need-to-know-to-start-your-day-kkentmvn

William LeGate
@williamlegate
·
3h
Elon Musk just tweeted about the stock & they’re now trading at $192 after-hours… if they open at this price, Melvin Capital will go bankrupt tomorrow morning. $13.1 billion in wealth transferred from Wall St to Reddit trolls.

I wonder if this will snowball. The newly enriched Reddit crowd will have plenty of fresh money to push around other stocks.

Yep and SEC and regulators arent built for speed to stop it. Especially when there isnt already a clear cut law on the books that applies

Ranking the R3000 by SI%Float, the top 100 names are either consumer cyclical or healthcare. If the Reddit peeps force shorts to reconsider, there may be a move up in these shares. I’m going to look for ETFs that hold these stocks.

uhm… i’m on Elon Musk side on this one who’s thoroughly enjoying this. Most investors lose money with shorting (and options for that matter). Institutions have unfair advantages and who knows how many tricks to game shorts. They are the ones that need to be regulated.

And that this is mostly happening on RobinHood & with GameStop is just perfect!

Too bad I only own two of the top most heavily shorted stocks (by %of float) WWR +20% and FLGT +8%

I’ll be buying a despicables strategy tomorrow and join the fun. My guess is this will last a while. Anybody come up with a good screen ?

I just wish Elon would bring back the ShortsShort . Just in time for valentine’s too.

Not touching this with real money, but if you wanted to rank stocks by most likely to owned by overly exposed hedge funds who could get caught in a huge short squeeze (I’m not even using price action). … now if you could combine this with social media and Google Trend analytics.


Is Fight Club missing a node? Eight equally weighted nodes should have 12.5% weights.

Walter