What Fitbit Short Sellers Should Learn From This Week's Action

Traders got a small taste of the dangerous short squeeze potential that Fitbit Inc FIT has this week when the stock surged 7.4 percent on Tuesday without any meaningful news from the company.

Fitbit’s app reached the top spot on Apple Inc. AAPL’s free iOS app downloads list this Christmas, but the company has a long way to go before it translates that popularity into impactful growth for its shareholders. In fact, Pacific Crest retail inventory checks indicate that Fitbit may be in for a tough Q4 earnings season.

Following Tuesday’s surge, Fitbit shares quickly retreated and are now roughly flat over the past five trading sessions overall. Fitbit short sellers have made a killing betting against the struggling wearable device maker, and the stock is on track to finish out the year down more than 75 percent.

However, potential short sellers that are late to the game should take this week’s brief spike as a warning. According to shortsqueeze.com, Fitbit currently has an extremely high short percent of float of 31.4 percent. The stock has more than 42.3 million shares held short with 4.3 days to cover.

As Fitbit shares have plummeted, the short trade has become extremely crowded. Short interest is up more than 55 percent in 2016.

With this many shares held short and such low expectations for Q4 earnings, Fitbit has some explosive short squeeze potential headed into 2017.