Anavex Life Sciences Corp (AVXL)

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Next Week, Let’s See if a Squeeze Happens

EXPECT A SHORT SQUEEZE NEXT WEEK FOR AVXL!!!

For those (few) unfamiliar with a "short squeeze," it works like this.

“Shorting” a stock is a way to make money when its share price declines. Short sellers borrow shares of a stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place. Then, later on, they make money when the short position is “closed” by actually buying back the stock, at a lower price. By doing that they’ve “covered” their short position.

But while the short position is open, when the purchaser has effectively borrowed the ownership of his short stock position and waits for its share price to decline, he has to pay to the original owner of the stock a bit of interest. There is an on-going cost to maintain temporary “ownership” of the borrowed stocks.

But if the actual stock price of the equity declines, the stock can be purchased at the lower price and the short position is closed; a profit is realized.

For those holding (and paying for) a short position, well and good — but only if the share price declines.

But for AVXL positions, short or long, the share price (as it did today) is now likely to strongly appreciate; go up. The price went up today 6.69%. A very fine one-day increase. But with favorable top-line clinical results from the blarcamesine Alzheimer’s study next week, the chances or forces for an AVXL price decline will instantly evaporate. The share price will rise; depending on the market’s perception of appreciated future values. Perception that the clinical data will prompt the FDA to approve the drug as an Alzheimer’s therapy will, in some time period (probably a few days to a few weeks) result in multiple ten-dollar share price increases.

That’s where the “short squeeze” happens. The people owning short positions in AVXL need to “cover;” need to quickly buy back ownership of the borrowed stock so the borrowed shares can be returned to their original owners, the people who at an interest rate loaned them out. The longer they wait to cover their short position, the higher the buy-back prices will be.

Shorting a stock is one of the few stock investment vehicles where potential liabilities are essentially unlimited. For those of us who hold regular AVXL positions, if Anavex goes bust, we have the potential of losing every penney we used to accumulate our shares. But in the case of short positions, the losses are limited only by how high open market share price ascends to. It’s not unreasonable to imagine an AVXL share price over $100 in a few weeks or months.

People holding short positions don’t want to have to cover at those high prices. So, just as soon as they perceive that the share price will not decline, but instead ascend, they will promptly cover their positions. They’ll get in the market and actually buy as many shares (at the existing share price) as they have in their short positions.

It will be costly. They may have taken their short positions well below today’s $12.12 share price. If they wait to cover on Monday, and the price has continued to elevate, they will have to spend even more to cover their open short positions.

But here’s the real squeeze. Millions of shares right now are held in short positions. Not hundreds of thousands, but millions. [Someone can post the short-position total.] That means that many millions of shares will have to be covered, purchased in a short period of time. For the shorts, a big problem. With ascending share prices, driven by good and valid corporate news (favorable clinical outcome data), who’d want to sell any AVXLs at a cheap price? Just hold a “for-sale” position for a period of time (days or weeks) and see where the price finally levels out. Sell then; but not before.

With dozens of short sellers trying to rapidly cover their open short positions there will be lots of buyers, and not many sellers. One short puts in a bid to buy 100,000 AVXL shares at $14.00. With that, another short has to put in a competing bid; he bids $14.25. Someone else counters with a $14.35 bid. The guy with the $14.00 feels his blood pressure rising as each of his bids is instantly eclipsed by someone else trying to close his open short position. Lots of desperate buyers posting ever higher bid prices for bids of 1000x share orders.

Knowing what I know about Anavex’s future, when they will be able to sell blarcamesine for one, two, or even three big CNS diseases, treating many millions of patients around the world, I feel sorry for those many who have taken AVXL short positions. Chances of winning with any of them, which depends on Anavex going completely bust, is now nil. Just the opposite. There will be a short squeeze with AVXLs. Who knows where the share price will level out? On the basis of the clinical results alone the share price will ascend steeply. Add in the price pressure of the shorts trying to limit their losses, and who knows where it will end?

In fact, the AVXL short squeeze event may be what actually appears on financial news sheets; not the actual clinical results. “Anavex Share Price Driven by Giant Squeeze: Buyers Desperate for Shares.”