Researchers have examined short squeezes over recent years. This analysis shows the ways in which the GameStop GME short squeeze, as the saga lengthens, has some increasingly unique aspects compared to many squeeze events.
Short squeezes are quite common, we see hundreds in a typical year with more at times of market volatility, but the GameStop squeeze is relatively unique in terms of both its length and the apparent absence of major positive newsflow from the company.
The GameStop short squeeze has now lasted far longer than we might expect. The typical short squeeze lasts one or perhaps two days, with the major price spikes often happening overnight. GameStop has been broadly rallying for two weeks now, if not longer, with some big swings during trading hours. Though, perhaps driving that, the sort of interventions we’re seeing from brokers and regulators are far from typical.
Secondly, short squeezes are most commonly a reaction to a positive news event. Now other elements are often needed for a short squeeze too, but a positive news announcement often comes before a short squeeze.
Of course, GameStop did announce holiday trading details and a board reshuffle on Monday, January 11, but the stock was largely flat the next day. The real move up in the stock didn’t begin until Wednesday, January 13. It continued over the subsequent two weeks without obvious newsflow from the company. That’s unusual.
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As a result, the GameStop short squeeze has less of a clear link to newsflow than we might expect from a short squeeze.
That said, GameStop is consistent with short squeezes in other ways. Short squeezes often coincide with market rallies and that’s largely what we’ve seen over most of January, though the broader rally appears to have petered out in recent days. We can see more squeezes at time of elevated market volatility, and that too, seems consistent with the start to 2021.
Secondly the technical aspects of the short squeeze are quite consistent with what we would expect. GameStop short interest was extremely high. This made the stock at high risk for a potential short squeeze event.
Finally, the price spikes from short squeezes can take longer to fade than we might expect. Though of course with GameStop the price spike hasn’t just lingered, more price rises have followed. Perhaps GameStop might be considered a series of short squeeze events, rather than just one.
In The Short Squeeze: The “Invisible” Cost of Short Sales researchers Wei Xua and Yu Zheng examined what they classified as 500 to 1,500 short squeezes a year over the 1992 to 2013 period. That assessment shows that GameStop is a longer and less newsflow driven squeeze than we might expect. Though the technical setup is quite consistent with other squeezes and there’s no real indication that the markets are broken. Of course, we should also remember that the GameStop short squeeze saga is not yet over.