S3 Partners: Expect Lyft Shorts To 'Put The Pedal To The Metal'

Lyft Inc LYFT dropped another 3 percent Tuesday morning after falling 12 percent Monday to drop below its IPO price of $72.

Big-name tech IPOs have provided short sellers with some extremely profitable opportunities in recent years, but one analyst said this week’s selling isn’t coming from the shorts.

Shorts Holding Ground

Financial technology and analytics firm S3 Partners analyst Ihor Dusaniwsky said Lyft investors can’t blame short sellers this time.

Since Lyft’s IPO shares still had not settled as of Monday afternoon, they were not yet in lending programs. Despite Monday's huge sell-off, Dusaniwsky said there are simply not shares available for short sellers to get in on the action. In addition, IPO underwriters are prohibited from lending their shares for 30 days following the first day of trading, so only a small fraction of Monday’s 34 million-share volume came from short sellers.

“Brokers are usually very conservative on pre‐IPO settlement short sale locates in order to minimize their future stock loan exposure by approving the bare minimum of short sales to keep clients happy, but not run afoul of Reg SHO on settlement date,” Dusaniwsky wrote in a Monday report.

He said Lyft IPO shares will begin to settle on Tuesday, and traders will start to get a feel for how aggressive short sellers will be.

“We can expect further price weakness when the shorts are allowed to put the pedal to the metal and redline their trading strategies,” Dusaniwsky said.

Unfortunately for Lyft short sellers, the lockup of underwriters and company insiders likely means borrowing fees for Lyft shares will be extremely high, at least initially. Dusaniwsky said traders can expect more extreme volatility from Lyft stock for at least another week as the dust settles on the IPO.

Technical Difficulties

In the near term, Lyft already has some key technical resistance levels in place that may be difficult for the stock to overcome.

Lyft has yet to close a session above its opening price, so a Tuesday close above $66.90 could be the first signs that a near-term bottom could be in for the stock. The psychological $72 IPO price level will likely offer another potential resistance level as it represents the break-even point for IPO investors. Finally, the $87 level could also provide resistance given it was the price initial public investors paid for the stock when it first began trading on Friday.

The worst-case technical scenario for Lyft investors on Tuesday would be a close below $66.90, an indication that the near-term post-IPO sell-off is not yet exhausted.

At time of publication, Lyft's stock was trading at $67.89 per share.

Related Links:

Seaport Global Starts Lyft With A Sell: 'A Big Leap Of Faith'

Wedbush Says 'Too Early To Be Over-Reactive' With Lyft

Photo courtesy of Lyft.