GameStop short sellers flee. The bulls may want to return them.

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The short narrow that helped drive

GameStop

the parabolic race of actions loses strength. Investors should be cautious.

GameStop

shares (ticker: GME) fell 42%, to $ 129.98, in the afternoon. Shares fell to $ 74.22, but bounced back slightly as Robinhood eased stock buying restrictions a bit. Meanwhile, data from analysis firm S3 Partners, which has sold short-term, indicates that short interest in the shares has returned to Earth.

This was stated by Ihor Dusaniwsky, Managing Director of S3 Partners De Barron on Tuesday, that only 26.09 million GameStop shares were recently sold short-term, or about 51% of the shares available for trading. This fell to more than 35 million shares last week alone, implying that last week’s increase was driven in part by large-scale short coverage.

If you consider the so-called synthetic longs, which are long positions that can be double counted as a result of the short-term selling process, S3 estimates an adjusted short-term interest of only approximately 34% of the shares available for trading. . When an entity lends its shares to a short seller, the short seller sells to a new owner. Technically, both the original holder and the new buyer are long, although no new shares have been created. Dusaniwsky says adjusting this process gives a more logical and accurate view of short-term interest.

While brief interest has been an element of GameStop’s short compression phenomenon, which has led to an increase in video game chain stocks as negative bets close, there is another side to this phenomenon. . It can cause problems for bulls “if you kick out the short side of the market,” said Steve Sosnick, chief strategist at Interactive Brokers.

“One of the things that shorts do when they go down is that they provide a little bit of support, because they tend to make a profit” buying stocks, Sosnick said De Barron in an interview last week. “If you kick out all the shorts and then something falls, there will be less to stop.”

The abnormally high interest rate may be a bullish sign, as it proved to be in the case of GameStop, as shorts should eventually be covered, Sosnick said. On the other hand, a very low short interest rate could be a bearish sign.

“We already had very low interest in the market in general and that will make a lot of shorts,” Sosnick added, referring to last week’s concentration on very short stocks like GameStop,

AMC Entertainment,

and Bed Bath & Beyond. “So, you know, it has to really reduce the level of short interest. Once covered, and not because they want to, but because they have to, who is left? Who is the marginal buyer right now? “

In the RedDit forum of WallStreetBets, the de facto hub of the GameStop retail investor movement, users are urging each other to buy the dip and hold existing long positions. But at least one notable investor has not heeded this advice.

Barstool Sports founder Dave Portnoy said Tuesday he has sold all of his “meme stocks,” which have gone viral on social media, far exceeding reasonable valuation metrics. Portnoy publication he angered people who say such actions may still increase, though he noted that he lost about $ 700,000 for those names.

Gary Black, who was one of Bernstein’s leading tobacco analysts in the 1990s and a former CEO of Aegon Asset Management, he said on Twitter he believes the compression is “completely over, as hedge funds that offset their short-circuit positions and other hedge funds during the understanding period move on to other operations.” Black is also active

Twitter

talking about electric vehicles.

Dusaniwsky estimates that people who have already lent GameStop shares and sold them in the short term pay a 19% debt commission, but notes that these rates are “significantly reduced as the fund is being replenished. loans as purchase coverage loans can be obtained ”. He is seeing loan commissions of new securities between 10% and 20%. Higher rates are one of the motivators that drive short sellers to hedge their positions.

Write to Connor Smith at [email protected] and Avi Salzman to [email protected]