After nearly a month's worth of extreme bullishness driving the car-rental company's stock more than 400% higher, today's tumble following a similarly sized setback on Wednesday has nearly dragged Avis Budget Group's (CAR 6.79%) shares back to the rally's starting point.
Superficially, blame JPMorgan. In reality, chalk it up as the inevitable eventual outcome of traders' efforts to force a stock to perform to their advantage.
Most short squeezes end this way
It's called a short squeeze.
In simplest terms, short-selling is the sale of a stock you don't actually own in anticipation of that ticker losing value, with plans to buy that stock in the future at a lower price, locking in a gain while closing out the risky position. If enough people can force a heavily shorted stock to move higher, however, its short sellers are expected to make panicked buys at any price to cut their losses, thus driving that ticker's price even higher, prompting even more panicked buying, and so on ... a short "squeeze."
That was the game traders were playing with Avis Budget Group over the course of the past few weeks. As of the end of March, CAR's short interest stood at just over 9 million shares (almost one-fourth of the total number of outstanding shares, and nearly the entirety of the float), making it a prime short-squeeze candidate. And for a while, the tactic -- often employed by traders anonymously using the internet's message boards to make their bullish argument -- worked well enough.
NASDAQ: CAR
Key Data Points
As is so often the case, though, when the gains prompted by presumptions of a short squeeze stopped working for Avis stock, they stopped working in a big way! As of 11:56 a.m. ET Thursday, CAR shares are down 48.6%, bringing their total two-day tumble to nearly 70%.
JPMorgan arguably got the bearish ball rolling today, downgrading Avis Budget Group's stock on valuation concerns. It would be naïve to believe, however, that Thursday's plunge wasn't going to materialize sooner or later, with or without JPMorgan's nudge.
The best way to win is to not play the game
As for what's next, nobody really knows. That's the problem with short squeezes. It's still not clear if this volatility has run its full course yet, since it's not clear if traders intend to start buying or shorting this ticker again from here.
Of course, this is also why most ordinary investors are better off avoiding such speculative activity altogether, and instead focusing on measurable fundamentals reliably reflected in a stock's price.
