Tesla, Wayfair And Other Profitable Short Trades Could Get A Short Covering Boost

Short squeezes are one of the most powerful stock market dynamics and can generate huge moves in stocks in a short period of time. Short squeezes happen when short sellers buy a stock to exit their positions all at one. The buying volume from short covering combines with the buying volume from long investors and pushes the stock much higher.

Short squeezes are typically triggered when a rise in stock prices produces heavy losses for short sellers and they're forced out of their positions. However, S3 Partners analyst Ihor Dusaniwsky said Tuesday that profit-driven short selling can also trigger large spikes in share price.

With the SPDR S&P 500 ETF Trust SPY down 24.9% in the past month, short sellers have been profitable pretty much across the board. But if heavily shorted stocks start to rally, Dusaniwsky said short sellers could start to close out their positions as soon as they see their profits disappearing.

Tesla Inc TSLA has been the most profitable short in the U.S. market since Feb. 19, generating $8.2 billion in profits for short sellers as of the end of last week. Apple, Inc. AAPL is a distant second on the list of most profitable shorts, generating $3.4 billion in mark-to-market profits.

Short Squeeze Candidates

Dusaniwsky said Tesla, Apple and other popular large-cap shorts could see a rise in short covering volume if their stocks continue to rally this week. He said the biggest possibility for profit-taking short squeezes is among mid- and smaller-cap stocks. Here are the five most profitable shorts among that group:

1. Carvana Co CVNA, +$1.32 billion.
2. Eldorado Resorts Inc ERI, +$1.22 billion.
3. Occidental Petroleum Corporation OXY, +$1.07 billion.
4. Wayfair Inc W, +$987.5 million.
5. Macy's Inc M, +$963.6 million.

Dusaniwsky said traders looking to go long during the market recovery should keep a close eye on these profitable shorts.

“Buying a big short winner today may prove to be an even bigger long winner tomorrow,” Dusaniwsky said.

Benzinga’s Take

Many of these most heavily shorted stocks are heavily shorted for a reason, so long-term investors should be cautious about being too aggressive in buying the dip. Make sure to fully understand the bear thesis before doing any bargain hunting during the coronavirus dip.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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