There is a lot of chatter around the Short Interest Ratio and we wanted to share some insight on this topic.
The excerpt below came from a great book by Harry D. Shultz - Bear Market Investing Strategies.
If we apply this logic to GameStop (GME), it was clearly a buy (in perfect hindsight) because the short percentage was 226% in in mid-January.
This is worth noting in the next short squeeze scenario.
Remember that trader who appealed to the public for assistance after his short sale turned into a -$106K loss overnight? If you don’t then you could read the full story here.
The trader had bet that KaloBios (KBIO) would decline in price instead of rise. Unfortunately, the opposite occurred, putting the trader in the unlikely position of going from a cash positive brokerage account to a deficit of more than -$100,000.
Irony of all ironies, KaloBios Pharmaceuticals ends up filing bankruptcy on December 30, 2015 after Chief Executive Martin Shkreli was arrested for securities fraud. Below is the price history of KBIO from 2014 to the present.
What’s the moral of the story? Anything can happen and the chasm between entering and exiting a transaction can be wide and deep. Always prepare for the worst.
Posted in Black Swan, Nipper Panic, short selling
"U.S. equity exchanges have catered to such clients since at least 1997, when the NYSE ended its century-old practice of quoting stocks in eighths of a dollar. It shifted to penny increments in 2000. That eroded earnings for NYSE and Nasdaq market makers, who profit from the difference between bids and offers. For investors, it helped reduce trading costs.
The exchanges sought to compensate for the lost business by paying rebates to high-frequency brokerages that buy shares at the best public prices. Exchanges have also overhauled their trading systems to cut transactions times and rent space in data centers so it takes less time to transmit information to buyers and sellers. Bats Global Markets processes orders in less than 400 microseconds, or 0.0004 second, which is about 1,000 times faster than humans blink their eyes."
Edgar Ortega, Jeff Kearns and Eric Martin. "High-Frequency Traders Say Speed Works for Everyone." Bloomberg.com. July 28, 2009. accessed July 29, 2009.
This issue of stocks trading in pennies instead of eighths is critical to the increased manipulation of the stock market. This was a specific matter that I raised in my March 16th posting.
Also, in the comment section of the same March 16th posting, I got a great question about the effectiveness of limit orders and stop loss orders. As I said at the time, your only tool for avoiding the maximum amount of market manipulation is to place market orders. As early as August 12, 2008 in my sell recommendation of Helmerich and Payne, I stated that only market orders should be used to avoid manipulation. Any individual investor who uses automatic orders as a form of "protection" is really subjecting themselves to greater losses and diminished gains. You heard it here first. Touc.
Please revisit Dividend Inc. for editing and revisions to this post.
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Posted in Automatic Orders, Goldman Sachs, manipulation, pennies, short selling, uptick rule