Short Squeeze or AIM rally?

It’s probably both.

2013 has got off to a flyer and it’s not surprising to see some AIM listed commodities bouncing back strong after being neglected for the bulk of 2011 and 2012. Markets/Traders often rotate from sector to sector or index as they seek the next value opportunity whether that be targeting over bloated stocks or under performers.

It’s been quite odd to witness QE3 (and QE4) in full flow and many of the FTSE 100 and 250 stocks zipping up like they’ve been sucking on new years’ helium balloons. Earnings have been lacklustre yet the city firms keep buying them. That’s the trouble when you’ve got wedges of QE3 cash to wash through the system – you go for the low risk economy rinse and skip the mega double wax deal. The mega double wax deal is of course reference to the all sparkling and shiny high risk growth stocks. They offer great returns on success but can deliver more than a bloody nose upon failure.

So as we enter another earning season/quarter, it’s probably no surprise to see some of the traders/market move back to the neglected high growth E&P sector. After all, some of these stocks are trading at below 2009 levels when oil was priced at $40 per barrel. It’s bonkers. Whilst funding is far from easy and RBL’s are tricky to secure – finance has improved as the banks have stabilised. This is one risk factor that has changed over the last 3 years. Not much, but it’s likely to get better if the Banks continue to grow and recover. QE3/4 helps too.

There;s a saying in the market that goes like this… ‘Volume is your friend’. How true it is. If a stock encounters higher than normal volume – it suggests that bigger fish are at play. This can work both ways. To the upside (share price rising) it’s clearly an encouraging sign of positive interest. To the downside (sp dropping) it’s normally a sign of negativity. Share prices in the AIM index are volatile and can move dramatically on minor volume. Hence it’s quite easy to see ‘fake’ rises or spikes which fade in a matter of days on low to average volume. But when volume is large – the move is often defined as ‘solid’. It doesn’t mean that it will last forever or that the stock will head up in a straight line – it’s simply saying… there’s some ‘weight’ behind this move.

With weight comes money. Higher volume means higher money flows. More cash being invested or traded etc. When you see a stock trade with anything over 3% of its float (or shares in issue) – then it’s not likely to be down to the little guy. It’s more than likely II’s or trading/broker houses as they have the firepower to drive large volume. Of course, on meaningful news days – pi’s or the smaller guy can give the II’s (Institutions) a run for their money as thousands seize upon good news or exit on poor.

So what happens when you see a stock trade with very high volume on one day or several yet see no news or events to justify it? Well, the chances are it’s not the little guy. It’s more than likely the II’s or broker trading houses plus a few TA/Chart followers.

Then – throw into the mix the ‘short interest’ or shares on loan (SOL). Stocks with high Short interest tend to see their share price fall as the weight of bets on the downside overpower any bullish moves upwards. It’s like having big daddy sit on your chest. Try and get up. Tough isn’t it?

Here’s a few Short interest charts to cast your eyes over along with the corresponding Share price performance.

Take Tullow for example… As you can see from the two charts, the short pressure takes its toll on the share price. It’s not always an exact science as sometimes the bullish investors can fight back altering the share price performance despite the shorts remaining the same.

Tullow1 TLW

Then look at Providence Resources (PVR). This stock does not have high liquidity so can move strongly on lower volumes. That said – the two charts provide a decent insight into how ‘short interest’ can be watched and used as a guide to determine potential buying opportunities. It’s never 100% certain but investors could do far worse than check out this kind of data on stocks they hold or plan to buy or sell.

PVR1 PVR

Last example is Bowleven (BLVN).

This stock traded abnormally high volume on Friday @ 22 million shares. The average is nearer to 7 million.

Just look at the huge drop in shorts interest on the chart below. Hence, as they buy back stock, the share price rises. However, the stock has taken it’s time to bounce back which suggests that those closing the shorts have done so successfully and with some control. Buyers might have been absent or TA followers simply watching for confirmation signals before joining in and adding the extra volume/weight to the moves.

The share price performance chart on the right suggests that a ‘balance’ might be achieved at around 83p to 85p ranges.

With a closing price on Friday of 74p, the correction or balance looks like it has some way to go.

That said – nothing is guaranteed in today’s markets and new short positions might be at the ready to counter such moves. One thing is sure, the shorts certainly covered or closed at the right time.

BLVN2 BLVN

And that appears to be the story across many E&P’s of late. Perhaps 2013 is the year where higher risk stocks come back into play.

If you want to check out short interest on the stocks you hold or the hotlist picks etc – follow the link below and see the chart field box at the bottom right end of the site.

http://www.efinancialnews.com/assetmanagement?mod=mainnav

Good luck with your investing/trading/research.

TheShareHub accepts no responsibility for any external sourced data from other sites. Information should be verified with the respected site.

One reply on “Short Squeeze or AIM rally?”

  1. Thanks Hub. So what is one explanation for a high volume of shares, a multiple turnover of free float, and a flat lining price and continuous bot trades keeping chariot oil down?

Comments are closed.