The brakes are off and the buyers are back. After limiting trading on stocks that got short squeezed, brokers re-enabled buy orders for GameStop (NYSE: GME), AMC Entertainment (NYSE: AMC), and others.
Robinhood CEO Vlad Tenev appeared on CNBC yesterday in an attempt to address the short squeeze confusion. During his interview, the speculative rally only gained steam.
“In order to protect the firm and protect our customers we had to limit buying in these stocks,” Tenev said.
“Robinhood is a brokerage firm, we have lots of financial requirements. We have SEC net capital requirements and clearing house deposits. So that’s money that we have to deposit at various clearing houses. Some of these requirements fluctuate quite a bit based on volatility in the market and they can be substantial in the current environment where there’s a lot of volatility and a lot of concentrated activity in these names that have been going viral on social media.”
When asked if there were any liquidity issues, Tenev assured viewers that Robinhood only took out lines of credit as a proactive measure.
“We want to put ourselves in a position to allow our customers to be as unrestricted as possible in accordance with the requirements and the regulations,” he explained.
“So we pulled those credit lines so that we could maximize within reason the funds we have to deposit at the clearinghouses.”
With “squeezed” stocks resuming their blast today, it will be interesting to see how much higher they can go after the weekend.
And, more importantly, if brokers decide to halt trading on them once more. But in addition to the stocks that have already surged, there are a few names that remain mostly untouched by the Robinhood crowd.
These stocks also possess “pre-squeeze” qualities, such as high short interest – the number of shares that have been sold short but have not yet been covered – and high short interest ratios, which divide the number of shares short in a stock by the stock’s average daily trading volume.
Typically, a short interest ratio greater than five indicates that a short squeeze could soon follow.
For Shoe Carnival (NASDAQ: SCVL), Revolve Group (NYSE: RVLV), and Carvana (NYSE: CVNA), that’s certainly the case.
RVLV boasts a short interest ratio of 5.0. CVNA, 10.9.
SCVL has them both beat, however, with a staggering short interest ratio of 16.4.
But unlike the the other short squeeze candidates, none of these stocks are up big over the last few trading sessions. Yes, they’ve risen, but they haven’t gotten even close to echoing GME’s moonshot.
That’s not to say they’re guaranteed to be short squeezed, either. A squeeze won’t result unless retail traders pile-in on these stocks, which would likely require a viral set of tweets or posts on WallStreetBets, the popular investing subreddit that initially sparked the short squeeze blitz.
So, while running out and buying stocks on short interest ratio alone isn’t a great idea, it’s something to be aware of in today’s short-term trading environment. For stocks like SCVL, RVLV, and CVNA, they may be worth taking a flyer on in the event of a surprise blast higher.
Because once Robinhood traders sink their teeth into a stock, they don’t want to let go. That could result in some easy winnings on otherwise unknown market offerings, should “short squeeze mania” continue.
