Unraveling The Long And Short Of Squeezes

Key takeaways

• Short squeezes are when traders bet a company will fall in value, but the amount of short interest causes the price to pop upwards instead
• There’s massive potential with short squeezes, but they’re one of the highest risk plays you can make on the stock market
• Companies with short squeeze potential at the moment include Dillard’s, Murphy USA and Wolfspeed – but anything could happen

Short squeeze stocks are the sexy part of investing that have inspired legendary stories, TV shows and even films. Knowing how they work could lead to big returns, but make sure you know the risks so you don’t play with fire.

Below we’ve got an explanation of what short stocks are, how you can benefit from them and the current companies with short squeeze potential – because while short stocks are risky, they can be fun too.

Short squeezes can be a part of your investment strategy without the stress of relying on individual stocks. Q.ai’s Short Squeeze Kit takes away the hours of research needed with an AI algorithm that sifts through historical data, market trends and sentiment to find the best potential candidates for a short squeeze.

The Kit refreshes weekly, so you’re never missing out on the hottest new opportunities for a short squeeze. Thanks to a nifty AI helper, the Kit is a great option for those looking to grow their returns while getting exposure to high short potential companies.

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What are short squeeze stocks?

Companies and their stocks rise and fall for a number of reasons: earnings reports, market conditions and new product releases, to name a few. But sometimes the writing is on the wall for investors that a company isn’t doing so well, so they bet that the stock price will fall, or ‘short’ it. When the stock price does fall, the short seller makes money.

A short squeeze is when those bets don’t pay off. High short interest is where the amount of shares gets bought up, making it tricky for short sellers to cover their positions. A sudden change in fortunes for a company could also drive up share prices. Short sellers then either need to close out their positions or buy up more stock so they don’t lose money, creating a short squeeze. This sudden, massive increase in demand can send the price soaring in a short space of time.

Sounds simple, right? But investing in a short squeeze is far from it.

Famous short squeezes

The best way to show what short squeezes are is to go through some of the high-profile examples because some short squeezes are the stuff of legend. One of the most famous examples is the 2008 Volkswagen and Porsche saga, where Porsche announced it had bought almost all of struggling Volkswagen’s circulating stock.

Around 12.5% of VW stock was on loan to short sellers when this happened, so they closed out their positions as quickly as possible – driving the share price through the roof. At one point Volkswagen was the most valuable company in the world, with shares at over €1000 and short losses in the tens of billions. Porsche CEO Wendelin Wiedeking was charged with market manipulation after the drama, but eventually the charges were dropped in 2016.

And, of course, who can forget the infamous Gamestop rally? The subreddit WallStreetBets, home of meme stocks and diamond hands, was the center of the controversy, ending with a congressional hearing. One user noticed traders shorting GameStop, which sparked a vast influx of retail investors buying the stock and even Elon Musk tweeting about the squeeze, driving GME shares from $20 to a peak of $480.

Some institutional investors had to close out their positions, but it all fell apart when the retail investing platform Robinhood suspended trading on the stock after getting dangerously close to its collateral limit. It was kaput for the short squeeze and some GameStop investors lost thousands of dollars.

How can investors benefit from them?

As we can see from the above two examples, short squeezes are volatile and not for the faint-hearted. The exciting part is that there’s theoretically no limit to how high a stock can go, which works out extraordinarily well for some investors.

Benefiting from a short squeeze is all about timing and a little bit (or a lot) of luck because nobody really knows exactly when one will happen. Short interest percentages can indicate whether a rally might occur: the higher the short interest percentage, the better the chances. It’s the same with short-interest ratios.

Once the squeeze has been squoze, the stock price will begin to fall, so timing is absolutely everything if you want to benefit from a short squeeze. No slacking off here: you need to pay attention by the minute in some instances, as a stock can turn that quickly.

There’s also the possibility of new short positions opening when traders bet a stock will fall in price again, but this is all about timing. It’s somewhat akin to gambling, so the risk to capital involved is significant without the proper research.

Current short squeeze stocks to watch

So which stocks do short traders have their eye on at the moment? All of these stocks are holdings in our Short Squeeze Kit.

Dillard’s

Premium department store chain Dillard’s has been targeted by short sellers as brick-and-mortar stores continue to decline, but the stock had a huge rally in 2020 after showing impressive growth and turning around its earnings figures. 2023’s economic headwinds could shake Dillard’s, sending short interest in the stock soaring.

Murphy USA

Gas station chain Murphy USA caught some short interest after soaring crude oil prices have hurt the industry. However, the seasonal summer holidays boom is approaching and workers are returning to the office, which could fuel global oil demand and spark short investors to cover their positions.

Wolfspeed

Finally, electronics company Wolfspeed has plunged in value in the last month thanks to reporting difficulties in ramping up its production and weak revenue figures. But many insiders of the company have been buying up more stock, which could suggest the stock is undervalued and set to rise soon.

None of these are guarantees, of course – short squeezes need a perfect storm to take off, and any of these factors could change at any time – but they’re stocks to keep an eye on, or let AI investing help handle it for you.

The bottom line

Short squeezes are often lightning-fast, leaving investors counting their riches or licking their wounds. They definitely shouldn’t make up the bulk of an investing strategy, but they can be a fun and lucrative way to make serious returns if you want a challenge. Just be prepared to lose funds just as quickly as you gained them.

Another option is Q.ai’s Short Squeeze Kit, where the secret ingredient is an AI algorithm that can find new insights on stocks quicker than any human. The AI scans the data on thousands of US equities, using historical data and financial intel from multiple sources.

The AI then refreshes the Kit’s holdings each week to include the companies with promising short squeeze potential, so you can benefit from the upside without putting all your eggs in one basket and to help you build wealth.

Download Q.ai today for access to AI-powered investment strategies.