A stock's "short qqueeze ranking" gives you a measure of how likely that stock's price is to rise as a result of panic buying by short sellers -- people who, in something of an ironic twist, have bet money on the price falling. The higher the ranking, the more likely those short sellers will get caught with their pants down.
Short Selling
If you believe a stock's price is going to rise, it's obvious what you can do to capitalize on your hunch: Buy some shares, wait for the price to rise -- and ka-ching! It's a little more complicated when you expect the price to fall. In that case, you have to do what's called "short selling." It's a five-step process. Step 1: Borrow some shares of the stock from your broker. Step 2: Sell those shares at the current market price. Step 3: Wait for the price of the stock to fall. Step 4: Buy back the same number of shares at the new, lower price. And Step 5: Give those replacement shares back to your broker. The difference between the money you got in Step 2 and the money you paid in Step 5 is your profit.
The Short Squeeze
The step in short selling where you buy shares to replace the ones you borrowed is called "covering your short position." If a lot of people have shorted a stock and then try to cover their positions at the same time -- say, because it looks like the price will rise again -- the result will be a surge in demand for the stock. That causes the price to rise. As the price rises, it eats away short sellers' profits. This is the "short squeeze." If the squeeze is bad enough, with too many "shorts" chasing too few available shares, the price may rise so high that the short sellers lose money.
Short Squeeze Ranking
The short squeeze ranking is an estimate of how likely it is that a particular stock will experience a short squeeze. The rankings are the result of a proprietary formula developed by ShortSqueeze.com, a financial data analysis company that sells the rankings to investors, brokers, analysts, media outlets and other customers. A ranking of 0 is neutral. Positive rankings indicate a greater-than-even chance of a squeeze. Negative rankings, as you would imagine, indicate a lower-than-even chance. The bigger the number on either side of zero, the stronger the indicator, so a ranking of 2,000 means a squeeze is more likely than a ranking of 50. A score at -3,000 indicates a squeeze is less likely than at -50. There is no maximum or minimum possible score.
Elements
ShortSqueeze.com doesn't publish the formula for the short squeeze rankings, but the company says the equation takes several factors into account. One is how many of the company's shares have been sold short, called "short interest," and how it compares to the total number of shares in circulation. Another is the "short ratio," which is how many days it would take to cover all of those shorted shares at the stock's current trading volume. The bigger the short interest and the higher the short ratio, the bigger the danger of a short squeeze. The final factor is recent price movements on the stock. The more a stock is showing signs of rising, the greater the likelihood of a squeeze.
References
Writer Bio
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.