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This Chart Says Another AMC Short Squeeze Isn't Likely

By James Brumley – Updated Dec 14, 2021 at 4:59PM

Key Points

  • Short interest in the stock has been declining for several weeks now, making no bullish impact in the stock.
  • The movie-theater chain's top two executives have sold big chunks of stock, sending a concerning message to prospective shareholders.
  • Rallies that capitalize on other investors' mistakes -- like AMC's surge earlier in the year -- tend not to repeat, as many investors learn from past errors.

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Many of the pieces of the puzzle that prompted the big rally in late May and early June are missing now, even if short interest remains relatively high.

If you're holding onto AMC Entertainment Holdings (AMC -1.77%) in anticipation of another short squeeze, don't hold your breath. The odds of another one taking shape for this meme stock just fell...again. In fact, the likelihood of a rally driven by short covering has been shrinking since September, reaching the lowest level in months as of the end of November.

Simply put, one of the biggest reasons traders have stuck with AMC this long is withering away. The next-best reason to own it is hope for a full revival of the theatrical film industry, but that's a long-term long shot as well, if the fact that Chief Executive Officer Adam Aron and Chief Financial Officer Sean Goodman have been selling their shares is any indication

But, first things first.

What's a short squeeze?

If you're not familiar with the term, a short squeeze is a way of artificially inducing the buying of a stock that drives its price upward. That buying effort is supplied by that stock's short sellers in an effort to quickly close out a trade that's losing money.

See, unlike the more conventional process of a buying a stock at a lower price and then selling it at a higher price in the future, short sellers sell a stock at a higher price now with plans to buy it back, or "cover," at a lower price later.

Person squeezing a blue foam stress-relieving ball.

Image source: Getty Images.

Yes, it's perfectly legal. It's also incredibly risky. Although your risk on a stock owned outright is just the dollar amount invested in that company, the risk of a short trade is theoretically infinite. That's because a short trade can only be closed out by buying back those shorted shares. The thing is, there's no cap on how high a stock's price can climb. A short squeeze is just a scenario where a little bit too much bullishness makes short sellers nervous, so they'll buy the stock back at any price just to exit that trade. Their buying nudges shares even higher, prompting another tranche of short sellers to do the same. Their buybacks push a stock even higher, causing even more increasingly nervous short sellers to head for the exit. Once the cycle gets going, it can really drive a stock upward, translating into huge losses for short sellers but big gains for those investors who hold the stock.

The prospect of a short squeeze, of course, encourages speculative investors to hunt out stocks that have been heavily shorted; some of them will even coordinate a buying effort to induce a short squeeze.

Similar, but not the same

That's what happened to AMC shares earlier this year. Realizing the COVID-19 pandemic had spurred a huge amount of short selling of the stock, individual traders coordinated an effort to force short investors to buy the stock to cover their short positions. Their campaign worked. In just a matter of days in late May and early June, shares of AMC soared from about $12 to more than $60. The stock's short interest -- the total number of shares sold short at any given time -- began to fall the next month, indicating that many of those short sellers had indeed exited their positions, suffering big losses. Take a look at that period in the chart below, which compares the stock's price to its short interest during the past 12 months.

AMC Chart

AMC data by YCharts

The thing is, some (though not all) investors have continued positioning for another short squeeze in the meantime. And understandably so. Short interest began to climb again in July, hitting a second peak in September.

A repeat performance of the previous short squeeze, though, just isn't in the cards for a couple of reasons.

One of those reasons is that this sort of trading gimmick only tends to work out when nobody's expecting it. The short sellers that were caught with their proverbial pants down just a few months ago aren't likely to walk into the same trap again. And, even the few short sellers who are willing to take such a risk are starting out with a big advantage that wasn't in play back in June -- that is, the stock's current price is about twice as high as it was then. There's plenty of room for it to fall, which is mostly what it's been doing the past few months.

The other -- and perhaps bigger -- reason a short squeeze is becoming more unlikely is that the short interest in this stock is falling. The 83.4 million shares shorted as of late November was the lowest since September's high of nearly 100 million, extending a trend that's been underway for a while.

Notably, all the buying that's necessary to cover these short trades has clearly not buoyed the stock. It hasn't even helped stave off the stock's big pullback since its September high.

Take the hint(s)

Never say never. Although another short squeeze is unlikely, anything's possible.

Investors who are being intellectually honest with themselves, however, have to concede that the odds of AMC shares moving meaningfully higher again anytime soon are very low and are shrinking.

Not even the company's management appears to be convinced of a bullish case. The company's CEO and CFO between them sold a little more than $10 million of their own AMC shares earlier this month, and CEO's sale follows the $25 million worth of AMC stock he dumped during November.  It would take more bullish rhetoric to get the stock moving higher to jump-start the short-squeeze cycle. With this sort of doubt about the company's prospects being supplied by the AMC's top brass though, there's little hope of that happening anytime soon.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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