Shares of Sundial Growers (SNDL 2.02%) soared on Wednesday in volatile trading. As of 3:15 p.m. EST, the popular marijuana stock's price was up more than 45%, after rising as much as 126.4% earlier in the day.
There is no fundamental reason why Sundial's stock price more than doubled this morning. The cannabis company didn't issue a press release or make any major announcements today. Instead, the likely culprit for today's massive price swings in Sundial's shares appears to be an attempt at a short squeeze.
In recent days, individual traders have used sites like Reddit to consolidate their purchases in heavily shorted stocks. (A short position is essentially a bet that a company's stock price will decline.)
By rapidly driving up their share prices, these traders hope to force short-sellers to exit their positions, which requires them to buy back the shares they sold short. This forced selling on the part of short-sellers can accelerate a rise in a stock's price.
After successfully igniting short squeezes in companies like GameStop and AMC Entertainment in recent days, these traders appear to have moved on to other companies. Sundial meets several of the characteristics of recently targeted companies, including a low share price, high short interest, and a story that is relatively easy to promote (the growth of the marijuana industry, in this case).
Yet rather than rush to buy, investors should take note of today's price action in GameStop's and AMC Entertainment's shares, which are currently down about 25% and 50%, respectively. Short squeezes don't last forever, and when traders inevitably move on to other stocks, investors who bought at inflated prices could suffer brutal losses.