dwlima is right. It is almost like a panick seloff in reverse, a panick buy by the MMs to keep from losing to much. As much as we joke about this, I really do not want to see it happen. That is why I refer to it as often as I do, because I'm hoping to see a more balanced and disciplined buy/sell process. Hopefully the MMs will cover at a reasonable price, rather than waiting for a big announcement that opens the buy flood gates.
I have seen companies that were terrible (scams, really) get caught in a short squeeze and their price go from 10 to 40 in a few months. In such cases, the shorts can eventually recover, because they know the company is not solid and eventually it will tank. But if the company is solid, the stock price will appreciate over time with or without the short squeeze. In such cases the squeeze only serves to skyrocket the price, usually to levels above what can be sustained, and then it drops down to where it can resume its steady growth. Look at IOM from Jan 95 (under $1) to Feb 96 ($25) then Jan 98 (15) for an example of that. IOM is down now, but that is for a different reason that the short squeeze, it is about competition IMHO.
What happens with an IOM, as happened with DGIV, is that the MMs underestimate the company's strength. Shorters drove DGIV down to 0.50 a couple of months ago, for no reason other than to make money -- that is what professional shorters do, they have to eat too. They don't really care about the company's prospects, as long as they can get people to believe that the company is bad. However if they make a mistake, as they did with DGIV, the price will eventually go back to its natural level, as we have seen. As soon as Jimmy announced a buyback, and several astute investors with deep pockets realized how undervalued this company was, and bought the float, the stock price took off. We talk about 1800% gains and all that, but make no mistake about it. The company did not appreciate 1800%. It only bubbled up to where it should have been all along, before the shorters tried to drown it. Now it is poised to grow based on the reality of contracts, NASDAQ listing, etc.
The problem is that if the MMs hold to their short position in spite of this, instead of taking their losse early, it creates a lot of pressure like tightening a rubber band. Then when the buying pressure exceeds their pain threshold, they have to cover and cover fast.
Hope that helps. |
