One big difference between GameStop’s 2021 meme-stock rally and some of the newest targets
One common feature of stocks that get the meme stock treatment is that they’re highly shorted.
The reasons for this are, in my mind, pretty simple:
When you’re buying a stock without much in the way of a fundamental catalyst, it helps to have a ready-made “greater fool” in hand who “has” to buy from you at some level.
It creates an “us against them” mentality that’s useful in forming and binding together a group of committed buyers.
The basic thinking is either that short sellers will be forced to close their positions because of losses, or they will be unable to hold that position because the borrow rate on the stock gets too high to justify keeping the position. (In addition, people who might want to short would be deterred by the high cost of borrowing shares to sell them short.)
Some maximalist versions of this line of thinking loomed large in GameStop’s surge to all-time highs in 2021.
When it comes to Kohl’s and Rocket Cos, two such stocks that have received some bursts of love from retail traders recently, that is decidedly not happening this time around.
“Market makers appear well-positioned to provide liquidity in the latest rallies of Kohl’s and Rocket Cos, as reflected by implied lending rates. After the initial hype, borrowing costs have snapped back to moderate levels around 10% annualized,” wrote Garrett DeSimone, Ph.D. and head of quantitative research at OptionMetrics. “This stands in stark contrast to GameStop’s (GME) January 2021 run, when lending costs soared to nearly 80% annualized, making the stock virtually impossible to borrow. Overall, this suggests that the potential for an extreme short squeeze is likely limited.”
Disclosure: I own some shares of Rocket Cos, and wrestling with what to do with a stock you own that gets some meme love has been annoying <world’s tiniest violin plays>.
