Short Squeeze Helping Propel January Rally
http://blogs.wsj.com/marketbeat/2012/01/31/short-squeeze-helping-propel-january-rally/
By Kyle Stock
Pessimism isn’t paying on Wall Street these days.
Relatively bullish U.S. stock markets are pulling along shares of some of the most criticized companies. Nine of the 10 most shorted stocks are up for the year thus far and up fairly big.
Those firms — which include Diamond Foods, Coinstar and LinkedIn — closed yesterday at prices 12.3 percent higher, on average, than the levels that they started trading at the beginning of the month. Only one has declined in January, ATP Oil & Gas Corp.
In comparison, the Dow Jones Industrial Average has climbed only 3.5 percent in that time.
As they say on Wall Street, the shorts are getting squeezed.
“You can have stocks that have a tremendous amount of momentum and just keep going,” said Robert Sluymer, a managing director in charge of U.S. technical research at RBC Capital Markets. “I think for many traders it’s been frustrating.”
A short sale is a bet that the stock price of a company will fall. To execute the strategy, traders borrow shares, sell them and then hope to buy them back at a lower level. The difference in the price at which they sell and the price at which they buy is profit, assuming the stock had declined.
The danger in shorting is that potential losses are not capped, which is why most short positions are held by fund managers and affluent institutional investors.
The short-squeeze may also be chalked up to something traders call the January effect, according to Pankaj Patel, a managing director in charge of quantitative research at Credit Suisse. Fund managers concerned about publicly posting their portfolio holdings at the end of the year or in need of a loss for tax purposes are more likely to sell a risky stock in October and buy a shaky share in January.
Indeed, the companies that are being bet against the most were dogged by bad press and poor results throughout last year. Diamond Foods, for example, has been the target of an accounting probe. Although almost half of its shares are on loan to short-sellers, the company’s stock climbed 11.2 percent in January.
LinkedIn’s business model has been under attack since its May public offering. Though it still trades well below its day one peak, the company surged 14.1 percent in January.
In short, there are quite a few investors who feel that these pilloried companies are finally undervalued.
“Right now, the short traders have a headwind,” Patel said. “But those who started shorting three months ago they are probably still in the money … And generally speaking, longer-term shorts are right.”
Kyle Stock is a business reporter at The Daily, which is published by News. Corp., the owner of The Wall Street Journal.
By Kyle Stock
Pessimism isn’t paying on Wall Street these days.Relatively bullish U.S. stock markets are pulling along shares of some of the most criticized companies. Nine of the 10 most shorted stocks are up for the year thus far and up fairly big.
Those firms — which include Diamond Foods, Coinstar and LinkedIn — closed yesterday at prices 12.3 percent higher, on average, than the levels that they started trading at the beginning of the month. Only one has declined in January, ATP Oil & Gas Corp.
In comparison, the Dow Jones Industrial Average has climbed only 3.5 percent in that time.
As they say on Wall Street, the shorts are getting squeezed.
“You can have stocks that have a tremendous amount of momentum and just keep going,” said Robert Sluymer, a managing director in charge of U.S. technical research at RBC Capital Markets. “I think for many traders it’s been frustrating.”
A short sale is a bet that the stock price of a company will fall. To execute the strategy, traders borrow shares, sell them and then hope to buy them back at a lower level. The difference in the price at which they sell and the price at which they buy is profit, assuming the stock had declined.
The danger in shorting is that potential losses are not capped, which is why most short positions are held by fund managers and affluent institutional investors.
The short-squeeze may also be chalked up to something traders call the January effect, according to Pankaj Patel, a managing director in charge of quantitative research at Credit Suisse. Fund managers concerned about publicly posting their portfolio holdings at the end of the year or in need of a loss for tax purposes are more likely to sell a risky stock in October and buy a shaky share in January.
Indeed, the companies that are being bet against the most were dogged by bad press and poor results throughout last year. Diamond Foods, for example, has been the target of an accounting probe. Although almost half of its shares are on loan to short-sellers, the company’s stock climbed 11.2 percent in January.
LinkedIn’s business model has been under attack since its May public offering. Though it still trades well below its day one peak, the company surged 14.1 percent in January.
In short, there are quite a few investors who feel that these pilloried companies are finally undervalued.
“Right now, the short traders have a headwind,” Patel said. “But those who started shorting three months ago they are probably still in the money … And generally speaking, longer-term shorts are right.”
Kyle Stock is a business reporter at The Daily, which is published by News. Corp., the owner of The Wall Street Journal.
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