Thursday, January 26, 2017

What is a Short Squeeze?

A short squeeze happens when too many people are forced to buy back stock -- and the supply is very limited. Microvision is a naturally supply limited stock (not a very large float) and further limited because there are a lot of people (like myself) who are holding a good number of shares and who will not sell.. (until a giant spike.)

When we get good news (which we KNOW is coming) -- the supply of shares for sale will decline to none, and the demand for shares to purchase will increase dramatically. Everyone wants a big screen for their smart phone, and for self-driving cars to have accurate LiDAR -- and augmented reality.

A caution about short squeezes is that they always over shoot, but in the case of Microvision with rising and vastly improving fortunes, I do not see it going back down as far. I won't even hazard a guess on how high things could go -- but as you see from the charts, things can get really out of hand.

Here are a couple of short squeeze charts for you to enjoy. (note the price scale on both charts.)

Wikipedia - Short Squeeze

short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes result when short sellers cover their positions on a stock, resulting in buying volume that drives the stock price up.

The Street

But Cramer said for those with inside knowledge of how the markets really work, these moves make perfect sense. In the case of Whirlpool, he said, the company has only 76 million shares of stock available. While that may seem like a lot, Cramer put the number into perspective by comparing it to the 4.6 billion shares that Exxon-Mobil ( XOM) has.

Cramer explained that when a company like Whirlpool continues to disappoint investors quarter after quarter, it builds up a sizable number of short sellers. In the case of Whirlpool, almost 10% of the company's available shares were sold short ahead of its most recent release. So when Whirlpool not only surprised Wall Street with great earnings but also raised guidance, it caught all of those short sellers completely off guard an d on the wrong side of the trade.

What ensues is a classic short squeeze, explained Cramer, where hundreds of short sellers all look to cover their positions at the same time, only to find there are no shares available at the current price. So the price rises. As the situation becomes more and more desperate, the share price will continue to rise, sometimes day after day, until all of the short positions have been covered. Cramer said the situation is often made worse by retail investors, who are also looking to buy shares since the company now seems to be on the right track again.

Cramer said the same pattern can be seen with Netflix and Green Mountain. There is no news propelling these stocks, he said, it's merely short sellers looking to buy huge quantities of stock, only to find no takers. They'll continue to bid up the price, dollar by dollar, tick by tick, until they can cover their mistakes.

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