In 2021, stock in heavily shorted AMC Entertainment Holdings, Inc. has increased more than fifteen fold. Short sellers have lost billions in it and other meme stocks like GameStop, and seem to be becoming more gun shy about short selling in general.
I came across an interesting research note today on this subject from UCLA’s Anderson School of Management:
…when short sellers abandon their short positions due to some event in the market, this can create a self-propagating circle — if there is less shorting, then there is less lending income for investors with long positions. These long investors now need to be compensated with a higher return to continue holding the stock, and this higher return dissuades short sellers from initiating short positions. This results in a cascade, where fear begets fear: When short sellers see their peers hesitate to initiate short positions, they refrain from shorting, thus propagating the cascade to the point where all short sellers pull back from the market.
Seeing your peers implode could beget fear as well.
If hedge funds are becoming increasingly afraid of shorting stocks, they will likely want to close out the short positions they have. They have to buy the stock to do that, and that demand could drive prices higher.
Were I them, I’d cut my losses and move on.
More on AMC:
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