Here’s why short floats matter

Everyone wants to find the next Gamestop (GME).

But those types of moves don’t just pop out of the woodwork…

Or do they?

There’s one indicator that can help you identify stocks before they make those explosive moves.

Short Floats!

And today, we’re going to explain what it is and how to use it to your advantage.

You see, our TrackstarIQ data highlights this important principle. 

Take a look at the top stock searches for this week from institutional advisors and retail investors.

Outside of many symbols matching, we want you to key in on the short float percentages. 

Notice how many of the stocks on the advisor list contain high short floats compared to retail?

Let’s dig into why that matters.

Understanding the short

Market participants buy stocks at one price and sell them at another. The difference is the profit they make.

We’re all familiar with that basic model.

However, you can bet against a stock by selling it short.

Here’s how it works:

  • You borrow stock from your broker on margin (loan).
  • They charge you a small interest rate.
  • You sell that stock in the open market.
  • Later, you buy the stock back at a lower price.
  • You give that back to your broker.
  • The profit is the difference between your selling price and buying price.

When you buy a stock, the total risk is the amount you pay (unless you borrow money to purchase additional stock known as leverage). So, you never lose more than you put in.

That’s not always the case with betting against a stock. In theory, a stock could go to infinity. In reality, you can get massive moves like Gamestop or a biotech buyout that sends shares soaring.

The short float

The short float is the total amount stocks sold short against the total available stock in the market.

There are a few different ways to measure this. Some measures look at all the possible shares that could trade, including shares held by insiders. Others look at all the common shares that can immediately be traded in the market.

Generally, you want to pick the one that is the most applicable for trading and investing. That’s usually the second measure.

Here’s the crazy thing.

Brokers sometimes loan out more shares than actually exist!

We saw that happen with Gamestop, which is why the short float exceeded 130%.

And you can imagine why this creates a problem.

The squeeze

Quite a few hedge funds got burned when Gamestop shares went flying as did plenty of retail traders.

They were caught in what’s known as a short squeeze.

As mentioned above, anyone who sells a stock short does it with borrowed funds.

At some point, their losses get too big, and the broker cuts them off (IE Archegos). This is known as a margin call.

Customers are forced to exit their positions. And the way a short-seller exits their position – buying stock back.

That sends prices higher, which creates more margin calls, and so on.

Using this to your advantage

Short floats go through cycles of interest. Sometimes we see high amounts of shorts and other times they’re lower.

One place that creates interesting opportunities is near all-time highs.

You see, when a stock is near an all-time high, chances are, it’s likely to keep going higher or at least break the all-time high.

And funny enough, plenty of short-sellers will put stop-loss orders – orders that cut their losses – right at those all-time highs.

When you combine those two ideas together, you get an interesting setup for price to move violently higher.

The best example of late – Tesla (TSLA).

Despite climbing higher and higher, people kept trying to short the company. For most of 2019 and 2020, the short float regularly exceeded 15%.

Anything over 10% is high.

And what happened to short-sellers? They got obliterated time and again. Eventually, Tesla became so popular and well-owned that the short float dropped down to the single digits (but is still fairly high).

Our hot take – This is only one idea on how to use this to your advantage. You can search for short float percentages on popular sites like Marketwatch and others.

Related posts

Peers Reducing Beta in Uncertain Times


Can this Stock Ease Your Stress?


Advisors Looking East and Going for Gold


Market Showing Some Crox


Tech Earnings, Elections and Covid Oh My!


Commodities at the Forefront as Elections Loom