Massive short squeeze underway; net call volumes for most shorted stocks reach 2nd-highest on record.

Massive short squeeze underway; net call volumes for most shorted stocks reach 2nd-highest on record.

In recent weeks, the financial markets have witnessed a significant increase in short squeeze activity, with net call volumes for many heavily shorted stocks reaching their second-highest levels on record. This phenomenon, characterized by a rapid rise in a stock's price due to a surge in buying activity, has been particularly notable among a group of stocks dubbed "DORK" by some analysts [1].

The term "short squeeze" typically refers to a situation where a stock's price increases rapidly due to a high level of short interest, forcing short sellers to cover their positions by buying back the stock. However, a recent analysis by Luke Kawa suggests that many of the recent rallies in stocks may be better described as "buyer's binges" rather than traditional short squeezes. This is because the magnitude of the volume increase often far exceeds the number of shares sold short, making it more likely that buyers are relying on other buyers to exit their positions rather than forcing short sellers to cover [1].

For instance, Kohl's Corporation traded over 200 million shares on Tuesday, while Opendoor Technologies traded nearly 1.9 billion shares on Monday. These high volumes highlight the significant buying power that has driven up the prices of these stocks. According to Kawa, even if short interest were to go to zero, the volume of buying activity would still be sufficient to drive up the stock prices significantly [1].

The DORK stocks—Opendoor Technologies, Kohl's, Krispy Kreme, and Rocket Cos—have been particularly affected by this dynamic. For example, Opendoor Technologies saw its volume increase by a factor of 13 times its short interest on its highest-volume day, while Rocket Cos saw a net increase in volume that would have been enough to cover its short interest 13 times over [1].

These massive rallies underscore the importance of understanding the dynamics behind stock price movements. While short squeezes can provide significant opportunities for investors, they are not the only factor driving stock prices. The recent buying binges highlight the role of market sentiment and the collective buying power of investors in shaping stock prices.

References:

[1] https://sherwood.news/markets/youre-thinking-about-short-squeezes-all-wrong/