There has been a lot of buzz about the recent news of Kodak preparing for bankruptcy. A few of my friends and colleagues have asked me if I thought it might pop back up as the result of an overreaction to its recent fall. As far as Kodak is concerned, I have no idea and I'm not willing to bet on it. This does however bring up an interesting concept that was one of my favorite "plays" when I actively day-traded. It's called the Short Squeeze. When a stock is heavily shorted and a large portion of its outstanding shares are being borrowed by short-sellers, often there is no one left to sell. Typically you will see price consolidate or "base" around a certain level. As no one is left to sell, price will rise to a point where many have set protective stop orders. These orders will trigger en masse as short-sellers rush to cover their positions. The resulting price action can often be very explosive to the upside. Below I show a stock price chart of Netflix, which was up nearly 13% yesterday as short-sellers scrambled to cover their positions. Netflix has been in a downward spiral since it topped out at $305 in July of last year, and is now trading at around $80, ouch. The overall health of a company might not matter in the short-term however, as speculators are forced to take action and cover losses/lock in gains.

 

Sam DiNorma

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).