GameStop short sellers run away. The bulls will want them back.

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The short tightening that helped drive

GameStop

parabolic running of the stock loses steam. Investors should be cautious.

GameStop

Stock (Score: GME) was down 42% to $ 129.98 late Tuesday morning. The stock fell to $ 74.22, but returned slightly, as Robinhood slightly eased restrictions on stock purchases. Meanwhile, data provided by analysis firm S3 Partners indicates that short-term stock interest has returned to Earth.

Ihor Dusaniwsky, CEO of S3 Partners, said Barron’s on Tuesday that only 26.09 million GameStop shares were recently sold short, or about 51% of the shares available for trading. It has fallen by more than 35 million shares in the last week alone, which means that last week’s increase was partly driven by short-term broad coverage.

If you consider the so-called synthetic longs, which are long positions that can be counted twice as a result of the short selling process, S3 estimates an adjusted short interest rate of only about 34% of the shares available for trading. When an entity lends its shares to a short seller, it then sells to a new owner. From a technical point of view, both the original owner and the new buyer are long, despite the fact that no new shares have been created. Dusaniwsky says adjusting for this process provides a more logical and accurate look at short-term interest.

While short interest has been an element of the GameStop short-squeeze phenomenon, leading to an increase in the actions of the video game chain as negative bets are closed, there is another part of this phenomenon. It could cause bull problems “if you drive away 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 give them a little bit of support because they tend to make a profit” by buying stocks, Sosnick said. Barron’s in an interview last week. “If you take off all your shorts and then something collapses, it’s less to get in your way.”

The abnormally high short interest may be a hallmark, as it turned out to be in the case of GameStop, because shorts must eventually cover, Sosnick said. On the other hand, a very low short interest rate could be a rising sign.

“We already had a pretty low interest in the market as a whole and this will really make a number on shorts,” Sosnick added, referring to last week’s rally in extremely short-lived stocks such as GameStop.

AMC Entertainment,

and Bed Bath & Beyond. “So, you know, it has to really reduce the level of short interest there. Once it covers, and not because they want to, but because they have to, who’s left? Who is the marginal buyer at that time? ”

On the WallStreetBets Reddit forum, the de facto hub of the GameStop retail investor movement, users are urging each other to buy the dive and keep the existing long positions. But at least one notable investor did not heed this advice.

Barstool Sports founder Dave Portnoy said on Tuesday that he had sold all his “meme stocks” – those that went viral on social media, far exceeding fair valuations. Portnoy’s post he angered people who say shares could rise, although he noted that he lost about $ 700,000 for such names.

Gary Black, who was Bernstein’s chief tobacco analyst in the 1990s and former chief executive of Aegon Asset Management, he said on Twitter he considers that the reduction is “almost total, because the hedge funds that have shortened their positions and other hedge funds during the period in which they are on other transactions”. Black is also active

Twitter

talking about electric vehicles.

Dusaniwsky calculates that people who have already borrowed GameStop shares and sold them short pay a 19% loan fee, but he notes that such rates “are significantly reduced because the loan fund is supplemented as the loan funds actions become available ”. He sees new share loan fees in the range of 10% – 20%. Higher taxes are among the motivators that determine short sellers to cover their positions.

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