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THE MARKET WHISPERER 24 9
As a result of the shorters needing to buy no matter what, the price was
pushed to a peak of $15 in just two days.
Did reasonable investors reach the conclusion that the stock was worth
$15, and buy in? No; in fact the opposite was true. It was clear to everyone
that the price would return to zero. It was mainly the panic of short sellers
forced to buy at any price that caused the spike. Once their pressured
actions eased off, the price increase ended and the stock dropped back to
a value of several cents.
Every so often, players with deep pockets will try to increase the
quantity of their shorts as the price is rising in order to average up a losing
trade, but even they have limits. Shorts come under great pressure when
these heavy players try to borrow shares from the broker and execute
more and more shorts as the price trends up. At some point, though, they
cannot receive any more shares on loan from brokers because the brokers
themselves hold only limited quantities, and using them “on credit” from
the original client, cannot be stretched any further.
What drives the stock price? This is what we should always be asking
ourselves. Is the stock being driven by fundamental data that improved
overnight? No: prices spike when an imbalance develops between buyers
and sellers. An imbalance results from there being more reasons to buy
and fewer reasons to sell. Thus, until the stock reaches its new balance, it
will continue rising.
An amazing phenomenon can sometimes be observed during trading:
a stock that hits the heavens! What should you do as you watch this
happening? Should you join in? If you are not extremely experienced, the
answer is a definite “no”! This is very dangerous territory. The long-term
core investors have no fundamental data to infuse confidence in the stock,
and short-term traders usually find no good technical formation that helps
them decide whether to enter or exit. The clamor can stop at any second,
and without any warning.
SMART It is best not to trade extreme intraday price spikes. This is
MONEY when the game gets too dangerous. You can never know
when the spike will peak, and usually you will not be able to
see a valid technical entry point.
Summary
So far, we have learned how shorts operate, the fundamental principles,
and what happens behind the scenes. You now know that:
