Every retail investor holding a position in AMC wants to know, when will shorts cover their positions? And I don’t blame you.
This one is a little tricky. See, it’s like saying, “when will retail investors sell their positions?”
Welcome to Franknez.com – the blog that fights for you, the retail investor. Today I want to discuss short covering.
Let’s get started!
Retail investors have been waiting patiently for AMC Entertainment stock to rip.
You’ve been holding through the ups and downs and even buying the dips.
So, why aren’t shorts covering their positions yet? What do retail investors need to do to squeeze hedge funds out of their money?
Are shorts obligated to close their positions?
Let’s start with the fundamental question. Are shorts obligated to close their positions?
Now, there are currently no rules regarding how long a short can hold before closing out their position.
However, lenders do have the right to demand the seller closes their position with minimal notice.
This is rare and only occurs if the the seller isn’t paying the interest fee, or the interest fee is ridiculously high.
“A short position may be maintained as long as the investor is able to honor the margin requirements and pay the required interest and the broker lending the shares allows them to be borrowed.” – Investopedia
When an interest fee is extremely high, it makes a stock difficult to borrow which obligates the short seller to close their positions.
AMC’s short borrow fee rate as of 5/04 is: 1.00% according to Stonk-O-Tracker.
Keep an eye on this interest as it will determine just how much shorts are bleeding.
Hedge funds currently shorting the stock are losing money every day. And regrettably for them it’s getting worse the longer they hold.
Why does the short borrow fee matter?
The short borrow fee is an interest that shorts must pay for borrowing AMC shares.
And although the fee has gone down, shorts are still paying a price for going long.
They will hold in hopes to drive AMC’s share price right back down to the floor.
However, AMC is trending upwards now and has absolutely no intention of going back down.
Analysts data and AI predictions all point towards a high possibility of a short squeeze.
Even Fintel’s short squeeze score has been as high as 80-90% in recent weeks.
This short borrow fee is going to continue to go up as AMC stock becomes harder to borrow.
For short sellers, a low short borrow fee is in their favor.
They would much rather pay the fee and stubbornly continue to hold their positions against retail investors.
But, if the short borrow fee is high enough to hurt the borrower, they will be more inclined to close their positions before losing an excruciating amount of money.
The short sellers conviction is strong, even though they’ve already lost.
It’s only a matter of time before they have no other option than to forfeit.
How can retail investors help drive the short borrow fee up?
Retail investors can help drive the short borrow fee up simply by holding their positions.
When AMC squeezes, retail investors will have to continue to hold their position on the way up.
Not every short will close their positions immediately.
If we begin to see AMC’s price action rise monumentally, it is important to understand that there’s more potential because not every short seller has closed their position.
We might see AMC drop a little after it peaks.
However, if retail investors continue to hold, it’s only going to continue squeezing more shorts resulting in further perpetual gains.
Melvin Capital suffered 49% loss 1st quarter
Community, this is massive. Melvin Capital is a hedge fund that has been shorting both AMC and GME stock. These are the people trying to drive the stock to the ground.
Melvin Capital suffered a 49% loss its first quarter of 2021, via. Markets Insider.
Retail investors are hodling to the moon.
They are not waiting for $100 price action anymore, and some are certainly not waiting for $500+ share price anymore.
The Reddit community is set new standards for the AMC’s stock price.
Here’s why this matters:
Not only are shorts losing money every day but huge hedge funds are bleeding billions of dollars due to retail investors holding
This is a huge win for retail investors – our favorite companies have been saved
Unless shorts close their positions, hedge funds will continue to suffer
Interest rates will continue to skyrocket for short sellers, enabling them to close their positions sooner than later
An AMC short squeeze might be closer than we think
Here’s what retail investors can do:
Continue to hold your positions, it’s free
Buy the dips to counter any short attacks
Share articles on social platforms that can provide value to the community and keep everyone informed
Keep a close eye on the stocks performance so you do not miss the squeeze
Hedge funds are not going to be able to recover from this.
Yes, they can possibly receive help from huge banks, but this too will be at a cost.
Furthermore, borrowing money from banks won’t change the fact that shorts still have to cover their positions.
Retail investors are buying AMC stock every day. Shorts are fighting a war they cannot win.
Important advisory: I am not a licensed financial advisory. I simply have a passion for finance and writing.
What happens when a short covers their position?
A short position will be profitable if it is covered at a lower price than the initial transaction; it is at a loss if it is covered at a higher price.
In AMC’s case, shorts who drove the price down to $5 but are still holding to-date are at a loss.
AMC is currently trading around $15.72 per share as of 5/4.
When there’s a ton of short covering happening in a particular stock, it will result in a short squeeze.
What is a short squeeze?
A short squeeze occurs when a stock spikes in price action due to an increase of short-sellers closing out their positions.
We’ve seen a short squeeze happen with both GameStop and Volkswagen. GME topped almost $500 while Volkswagen spiked shy below $1,000 back in 2008.
Short squeezes are massively profitable for retail investors.
These one-time phenomena are how people are able to accumulate wealth in such little time.
A lot of you have been sharing my posts on Facebook Groups, Reddit, Discord chats, and Twitter. Words can’t explain how grateful I am for you sharing positive and valuable information for new retail investors to look at. Thank you.
Tiger Global Management is down 34% this year through March.
The speed of the reversal has shocked just about everyone, considering that Coleman is celebrated as one of his generation’s brightest stars, a standout among the elite money managers mentored by the famed Julian Robertson, Bloomberg.
Tiger Global Management treads rocky waters
The bad run has been fueled by massive bets on stocks that have been hammered, such as fast-growing tech companies in the U.S and China.
Tiger Global hedge fund lost 7% last year, its first annual drop since 2016 and its third total, according to Bloomberg.
Tiger Global told clients in a letter that it’s opening up both its hedge and long funds to a limited amount of capital from existing investors to bolster positions in stocks that underperformed
However, we see the results in the first quarter of 2022 has not been what the hedge fund anticipated.
Built by Coleman and his partner Scott Shleifer, Tiger Global has long been seen as a throwback to the industry’s glory years, when double-digit returns were the norm and ‘hotshot managers’ unerringly backed winning companies and shorted the losers.
Across the firm’s $35 billion in funds focused on public companies, this year’s losses have triggered a more than $10 billion hit to investors that include foundations, endowments and pension funds, as well as Tiger Global insiders.
Coleman’s personal wealth has dropped by $1.3 billion, according to calculations by the Bloomberg Billionaires Index.
Coleman’s hedge fund headed towards worst year
Tiger Global hedge fund may be on track for one of its worst years yet.
The blue in this chart indicates the hedge fund’s losses in 2008, 2016, 2021, and 2022.
The firm’s first serious bump was during the 2008 financial crisis, when it lost 26%, followed by a 1% gain the next year.
While markets were already jittery this year due to high inflation and expectations of rate hikes, Russia’s war against Ukraine triggered a flight from risk.
The Russia-Ukraine conflict has affected every corner of the financial sector.
“We expect that each of these companies will grow their revenues and profitability over the long term, regardless of recent events and the various other challenges that the world will face over the short, intermediate, and long-term,” Ackman said.
What do you think led to Ackman’s complete business remodel?
After all, Pershing Square was one of the hedge funds that benefited from Fannie Mae and Freddie Mac half a decade ago.
Short sellers made approximately $100 million according to S3.
In a time where short sellers are under extreme scrutiny, do you think it’s possible this billionaire is trying to stay away from the likes of the Justice Department?
There are new SEC rules coming into play that could very well lift suppression imposed on so called ‘meme stocks’.
The SEC just released a report outlining the variety of ways they intend on protecting retail investors from market manipulation.
Heavily shorted stocks such as AMC and GameStop will skyrocket if these SEC rules are enforced.
And I’m going to break down why in this article below.
Welcome to Franknez.com – the SEC is proposing new rules that call for short seller transparency. In their report, they acknowledge what retail investors have been saying and have now come up with a plan.
Regulators acknowledge market manipulation in report
The SEC said in their report, “while short selling can serve useful market purposes, it also may be used to drive down the price of a security, to accelerate a declining market in a security, or to manipulate stock prices.”
This statement alone is very significant for many reasons.
The SEC doesn’t need to be convinced of market manipulation anymore, they’ve acknowledged it.
They understand exactly what’s happening in the markets and how it’s affecting retail investors.
Now it’s just a matter of finding solutions to lift the suppression being imposed on heavily shorted stocks such as AMC and GameStop.
Disclosure of short sell positions and activity could very well be the start of it too.
If you were slacking off at work but now have your boss micromanaging you, you’d be more inclined to refrain from slacking off, correct?
It’s this type of micromanaging we need to see regulators impose on short sellers so that the demand from retail orders accurately reflect on the price of a security.
However, there has been no way of identifying overleveraged positions or short sell activity to enforce no such acts are carried throughout the market.
That’s where rule 13f-2 comes into play.
13f-2 provides the commission for public disclosure:
The name of the issuer
CUSIP number (a unique identification number assigned to stocks and registered bonds in the United States and Canada.)
and number of short sales of each security
When enforced, this SEC rule will allow regulators to identify everything there is to know about a hedge funds short selling activity.
Community, this is quite big.
Public disclosures will occur every month.
“Buy to cover” rule and CAT firms
Proposed Rule 205 would establish a new “buy to cover” order making requirements for certain purchase orders affected by a broker-dealer.
The Proposal to Amend CAT would require CAT reporting firms to report short sale data not currently required that would enhance regulators’ understanding of the lifecycle of a trade – from order origination and through order execution and allocation.
This means the SEC will now have eyes on where a short sell comes from and where it gets processed and moved to.
Here is where naked shares may be exposed, recorded, and become obligated to get closed.
This Proposal to Amend CAT holds every party during the trade of a short sell accountable.
How do these rules lift suppression on heavily shorted stock?
The SEC says these proposals could help to advance the policy goal of investor protection by deterring market manipulation.
This means that when enforced, hedge funds will now be forced to play by the rules since all data is being recorded through a variety of parties, making it complicated to report inaccuracies.
The SEC on illegal short selling and “Bear Raids”
The SEC’s report is filled with information retail investors have been raising awareness about for over a year now.
They briefly go over the spread of false information from which short sellers profit from the decline of a stock’s share price.
“Market manipulators may seek to spread false information about an issuer whose stock they sold short in order to profit from a resulting decline in the stock’s price.”
This is something Elon Musk just recently spoke to CNBC about.
Hedge funds and corporate media have played a big role in “Bear Raids”.
Bear raids are an illegal practice to plummet a stock’s price through concerted short selling and the spread of false or negative information about the target.
This influences public sentiment and opinion.
We’ve seen this illegal practice too many times with AMC and GameStop.
Platforms owned by News Corp. attacked AMC and GameStop by publishing articles to derail retail investors from purchasing the stocks.
As millions of retail investors bought ‘meme stocks’, hedge funds shorting the stocks lost billions of dollars.
CEO and founder of hedge fund Citadel Ken Griffin coincidentally has a stake in News Corp.
The SEC warns short sellers of “Short Squeeze” risk
A short squeeze poses massive risk to not only hedge funds and market makers but also to small short sellers.
The SEC did not miss outlining the risk a short squeeze has on short sellers in their market transparency report.
AMC and GameStop’s current reported short interest is more than 20% each.
This is more than enough short interest to squeeze shorts from their positions.
And because hedge funds have been overleveraging their positions, this is no ordinary play anymore.
Hedge funds now have a ticking time-bomb that may cause systemic risk.
Will AMC and GameStop experience a managed short squeeze?
The same way we can pull each other up, we can also pull one another down.
Short Interest Data
To the best of my knowledge, there are two major factors that will allow us to identify when shorts cover.
The first is through the short interest data.
What does short interest data tell us?
The short interest helps us understand how much of a stock’s float is being shorted.
It’s the number of shares that have been sold short but have not yet been covered or closed out.
For example, a heavily shorted such as AMC has a short interest of 16.56% (currently).
Apple on the other hand has an SI of 0.62%.
Apple has almost no shorts to squeeze from their positions where AMC has 16.56% of the float shorting the stock.
That’s approximately 106.82 million shares out on loan that have yet to be covered.
So in theory, as shorts begin to cover their positions, AMC’s short interest data should begin to decrease.
Price Action Change
Another common way to identify whether shorts cover their positions is through sudden price movements.
Short covering adds momentum to the buying pressure of a stock which results in a spike or bullish run.
What makes identifying when shorts cover is that the price action and short interest data don’t align at the same exact moment.
The reported short interest doesn’t happen right away.
It’s actually released a week and a half.
However, when we look at AMC’s runup back in June, we see that AMC peaked two days after it’s last report high short interest.
It took two business days for AMC’s small short covering to take AMC from $31.81 to an all-time high of $72.62 per share.
The chart from Ortex below shows us a drop in short interest between the dates of May 28th and June 9th where the stock began to cool down from it’s runup.
We saw the short interest drop from 20% to 14.76% by mid July before shorts began taking new positions, further driving the short interest up past 19%.
And I know what some of you might be thinking. Shorts haven’t covered! They never did!
Community, I’m presenting you with data that shows how price fluctuated based on the short interest updates.
Strangely enough, when the short seller, not hedge fund, Iceberg Research announced they closed their short position in AMC, two days later we saw a very small increase in price action though retail volume was low.
People were quick to dismiss Iceberg simply because it’s one analyst publicly shorting AMC but I though the news was super bullish.
In fact, I hoped other short sellers would follow in closing too.
Will AMC Squeeze Based On The Current SI?
AMC’s current short interest as of the date of this publication is 16.39%.
AMC’s current short interest by definition is considered to be extremely high.
There is more than enough juice to get some serious price action out of AMC with this data.
And of course, if more shorts begin taking positions in AMC then the short interest percentage will continue to go up.
Otherwise, we can expect it to stay the same if they continue to hold, or decrease even if very small short positions are indeed being closed.
With AMC’s short interest slowly going down and an incredible amount of short shares being borrowed, I’m curious whether their exit strategy is to heavily short the stock while closing smaller short positions.
You can see how many short shares are being borrowed daily via. StonkOTracker.
Tinfoil hat on but I can see a strategy where the amount of overleveraged shorting is countering any small short covering.
Even then, this scenario is just speculation to be quite frank.
If you have any idea why the short interest is slowly going down I’d love to hear your thoughts in the comment section below.