Is This A Perfect Setup For A Short Squeeze From GameStop Stock?

Is This A Perfect Setup For A Short Squeeze From GameStop Stock? ...

Get GameStop Corp. Class A Reportcontinues to be the target of short-sellers. At high levels of short interest that make GameStop stock increasingly difficult to short, short-sellers need to be more resourceful to stay alive.

Despite the increase of over 30% during the May 25 trading session, a favorable arrangement for GameStop shareholders appears to have erected, putting a lot of pressure on short-sellers.

Is This A Perfect Setup For A Short Squeeze in Figure 1?

Reuters

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Cost-To-Borrow At Peak Levels

During the May 25 trading session, GameStop shares increased by about 29%. One of the reasons behind the rise might have been the substantial increase in borrowing fees that short sellers must pay to establish short positions in GME.

At one point, GME cost-to-borrow rates rose above 104%, indicating that only a few GME shares were available.

The following chart shows the history of cost-to-borrow rates in GME. In recent days, the numbers have reached their all-time highs.

GameStop has borrowed shares in Figure 2.

Stocksera is a stock market that is currently closed.

Shorting expenses are a result of utilization (amount of stock available to sell short), the amount available to borrow, liquidity, amount of shares available, volatility, and other factors that may avert asset pricing anomalies.

GameStop appears to have checked a few of the above boxes, which could have resulted in the key indicator going higher and keeping short sellers in line.

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More Short Squeezes In Sight?

Short squeezes, outlined in the GameStops 10-K filing, are one of the largest risks associated with the company''s stock market. This is also one of the main reasons why retail investors took on the game to begin with. Until now, short squeeze catalysts might lurk around the corner:

  • GameStop continues to be a strongly shorted stock, with short interest levels exceeding 20% of its rather modest float of 63 million shares AMC, for example, has a float of 513 million units.
  • Of the total float, at least 9 million shares are known to be registered on the Direct Registration System. The practice of using DRS is intended to leave retail investor shares out of the hands of brokers that can lend them to short-sellers.
  • The utilization rate in GameStop follows at over 100% for more than 70 consecutive days. If accurate, this rate implies that there are no more shares available to be lent for shorting. Keep in mind, it does not mean that short sellers cannot continue to short the stock. It means that they need to seek other resources to find available shares.
  • Finally, the cost-to-borrow rate is at its highest since the beginning of last year. With short sellers having to pay higher fees to bet against GameStop, they are naturally more vulnerable, especially if pressured by GME bulls.

The price of shares is rising, owing to increased interest in Retail investors, as well as GameStop''s meme stock power. According to a SEC report on GameStop''s trading activity in January 2021, popularity has been the key to increasing share price.

The main reasons for GameStop''s massive rise last year were: (1) frequent Reddit mentions, (2) clear coverage in mainstream media, (3) large volume of shares exchanged, and, certainly enough, increased short interest.

Following May 25, the buzz around GameStop has become as strong as ever. Reddit is now the most talked-about ticker on Reddit. See below.

On Reddit on May 26, Figure 3 shows trends.

Apewisdom

Ask Twitter

In the last five trading days, GameStop has increased by 37%. Is there a huge increase in popularity?

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Aside from the article, affiliate links may be included. These partnerships do not influence editorial content. Thanks for your support of Wall Street Memes)

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