What happened

MannKind (NASDAQ: MNKD) is up 44% at 1 p.m. EST Thursday on no apparent news.

Prescriptions of the company's inhaled insulin Afrezza should be driving the biotech's valuation, but they remain modest. A substantial deal with a large drugmaker to use MannKind's inhaled technology platform to deliver some other drug would increase its valuation, but nothing was announced.

Man holding figurines of a bull and a bear with the bull in the foreground

Image source: Getty Images.

So what

The most likely reason for the massive increase today is a combination of MannKind's share price hitting a level that investors think is too low to sell, combined with a short interest that reached nearly 33 million shares as of the middle of January, topping the highs set in 2017.

Short-sellers are naturally short-term thinkers since they're paying interest on the borrowed shares that they sold to start their short position; unlike long-term buy-and-hold investors, it's hard for many short-sellers to hold through an increasing stock price even if they're convinced the share price will come down again. Short-sellers also need to have collateral to cover their borrowed shares, and that requirement increases as the share price goes up, contributing to short-sellers bailing on their investment.

The end result is a "short squeeze" in which short-sellers have to buy to close their short position. Those buyers have to increase their bid price to find a seller, which results in even more short-sellers deciding to end their position. It's a vicious cycle that feeds on itself, resulting in massive increases for no apparent reason.

Now what

Short squeezes are great for long investors in the short term, but they're often short-lived. Unlike an increase in the number of prescriptions or the backing from a large drugmaker that have a material change in the valuation of the company, short squeezes only tell you the short-term valuation that the current buyers and sellers are willing to pay. Once the short-sellers close their positions, the valuation often returns to trading based on fundamentals.

For MannKind that means prescriptions of Afrezza and the potential of its inhaled insulin technology combined with its precarious capital situation, which determines how long it can stay in business. Long-term investors should look past today's move and focus on those fundamentals.