A number of stocks, led by DryShips Inc. DRYS 31.65%, have delivered mind-boggling gains in the week since Donald Trump’s victoryin the U.S. elections. The SPDR S&P 500 ETF Trust SPY 0.2% is up just 1.4 percent since the election, but DryShips has exploded more than 1,530 percent.
While DryShips may be one of the most extreme examples, there are plenty of other post-election movers as well. Euroseas Ltd. ESEA 14.6% is up 291.3 percent, Globus Maritime Ltd GLBS 29.29% is up 175.9 percent and Eagle Bulk Shipping Inc EGLE 10.7% is up 130.5 percent since Election Day.
There’s no question that Trump’s election has improved the fundamentals for shipping stocks, prison stocks and certain energy and healthcare stocks. The Baltic Dry Shipping Index is up eight days in a row and is currently at its highest level since 2014. However, moves like the 1,500 percent-plus jump by DryShips aren’t anywhere close to justified by fundamentals alone.
Short Squeeze
The typical short squeeze happens when a stock’s fundamentals unexpectedly improve. As a result, the surge in buying following the news is compounded by short sellers buying to close out their short positions. However, in extreme cases, such as the DryShips scenario, broker inventories can also come into play.
When brokers can’t get their hands on enough shares of a stock to close out traders’ short positions, things can get fairly chaotic.
Buy-Ins
According to the Interactive Brokers (IB) website, extreme cases of short squeezes can force brokers to close out short positions at market price without the short seller’s consent. This phenomenon is called a “buy-in.”
“Customers holding short stock positions are at risk of having these positions bought-in and closed out by [prime brokers], oftentimes with little or no advanced notice. This is a risk which is inherent to short selling and generally outside the control of the customer,” the website reads.
DryShips
Therefore, in the case of stocks such as DryShips, fundamental buyers are joined in the market by both voluntary short coverers and brokerages that are involuntarily covering customers’ short positions due to lack of inventory. To make matters worse, it becomes…
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