A short squeeze happens when almost all of the trading volume is shorts capitulating (buying) at the same time new shorts are establishing new positions (selling).
When the buyers are covering their short position and the sellers are less sophisticated short seller’s establishing new positions, the price can rise while the short interest stays very high. Usually this happens when the smart money is also buying and covering a short position becomes increasingly difficult. Buy stop orders are triggered causing short sellers to drive the price higher as they try to limit their losses. Because the buyers/owners strongly believe in the integrity of the management, they are not willing to sell. As the price of the stock vaults higher, the only way for the shorts to limit their losses is to buy at the market which drives the price even higher. It becomes a frenzy!
This doesn’t happen on the way down because the smart money will add to their holdings along with all of the analysts that are following the company. There is no theoretical limit to the potential losses that could be incurred by the short sellers.
This is the reason that Kerrisdale Capital and their fellow message board posters came out with the hit piece and followed that up with postings on the message board. They are scared to death and they have absolutely no ethical or moral compass guiding their tactics.
They must continue to short something like 200,000 shares per day to overwhelm the long term buyers. That becomes very expensive! Personally, I think they are running out of day traders wanting to take the risk of betting against some of the smartest people on the planet.
The long term risk/reward ratio makes no mathematical sense to me. Perhaps that is why Kerrisdale Capital is at the bottom of the performance list. However, I can’t argue with their 10 day returns. But they have not tried to cover their position yet.
