AMC’s Stock Set Up For A Short Squeeze

AMC Entertainment
AMC
, symbol AMC, more than doubled over the past five trading days moving from $12.08 last Friday to close at $26.12 today, up 116%. At one point it hit $36.72, which was 204% above last Friday’s close.

Keep in mind that the stock’s previous all-time high had been around $27 in March 2015 and January 2017. It wasn’t until yesterday, May 27, that it had broken those records.

A brutal week for the shorts

Ihor Dusaniwsky at S3 Partners tracks short interest in stocks in real time, and he posts a number of his charts on Twitter. While AMC’s stock was down $0.40 for the day from $26.52 to $26.12, for the week Dusaniwsky estimates that shorts lost over $1.2 billion and since the beginning of the year have lost over $1.9 billion.

This is on a company whose market cap was $248 million at the beginning of the year and is now $11.8 billion. And before Covid-19 impacted business the company’s market cap was about $750 million.

Short squeeze has not contributed to AMC’s recent rise

Dusaniwsky estimates that 89.6 million shares are shorted or 20% of the 448 million shares. As the chart below shows the number of shares being shorted fell significantly in late January (the gold line) when the stock had its initial pop due to wallstreetbets Reddit crowd jumping in.

As AMC’s stock price came back down the number of shares shorted steadily increased until mid-April, where it has essentially remained around 90 million.

Dusaniwsky has developed a Short Squeeze score and ranks AMC’s metric a 10 out of 10 for a short squeeze. He wrote, “A security is considered “crowded” on the short side if some or all of the following occur:”

• There is a large amount of dollars at risk on the short side (high short interest)
• There is a large proportion of a security’s tradable float shorted (high S3 SI % Float)
• There is scarcity of stock loan supply (high stock borrow fees)
• There is limited daily trading volume (high days to cover)

However, even when these criteria are met it does not necessarily mean the stock is a short squeeze candidate.

He added, “While a stock can be “crowded” it might not necessarily be a short squeeze candidate. An additional variable, which is necessary for a short squeeze to occur, are substantial net-of-financing mark-to-market losses.” Which the shorts have definitely seen this week.

He continued, “A short position, no matter how crowded, that continues to be profitable cannot be squeezed. No trader will be forced to exit a position that continues to be profitable. Mark-to-market losses are the primary impetus for a Short Squeeze to occur, and AMC’s recent rally has pushed it into potential Short Squeeze territory.”

In very overbought territory

With the huge spike in AMC’s shares they are definitely in overbought territory. In the top section of the chart below is the stock’s Relative Strength Index or RSI. When it gets above 70, and it is currently at 86.81, they are overbought. It would not be surprising to see them pull back in the short term, similar to what happened in early February.

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