GameStop’s short sellers are fleeing. Bulls might want them back.

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The short press that helped drive

GameStop

stock’s parabolic run loses steam. Investors need to be careful.

GameStop

Shares (ticker: GME) fell 42% to $ 129.98 late Tuesday morning. The stock fell as low as $ 74.22, but fell back slightly as Robinhood weakened its stock buying restrictions a bit. Meanwhile, data from short-selling analysis firm S3 Partners indicates that the stock’s sky-high short-term interest has returned to earth.

Ihor Dusaniwsky, managing director of S3 Partners, said Barron’s On Tuesday, only 26.09 million GameStop shares were recently sold short, or about 51% of the shares available for trading. It has declined by more than 35 million shares in the past week alone, indicating that the upswing last week was driven in part by large-scale short-term coverage.

If you take into account so-called synthetic lengths, these are long positions that can be doubled as a result of the short selling process, S3 estimates an adjusted short interest of only about 34% of the shares available for trading. When an entity lends its shares to a short seller, the short seller then sells to a new owner. Technically, the original holder as well as the new buyer are long, although no new shares are created. Dusaniwsky says the adjustment for this process gives a more logical and accurate look at short-term interest rates.

Although short interest was an addition to the GameStop short print phenomenon, the shares of the video game chain rose as negative bets were closed, there is another side to the phenomenon. This could cause problems for bulls “if you drive away the short side of the market,” said Steve Sosnick, chief strategist at Interactive Brokers.

“One of the things shorts do on the way down is it offers a bit of support because they tend to make a profit” by buying stocks, Sosnick said. Barron’s in an interview last week. “If you take off all the shorts, and then something goes down, there’s less to stand in the way.”

Abnormally high short-term interest rates could be a positive sign, as it appears to be in GameStop’s case, as shorts will eventually have to cover up, Sosnick said. On the other hand, very low short interest rates can be a clumsy sign.

“We have already had a fairly low stake in the market as a whole, and that will really do a number on the shorts,” Sosnick added, referring to the rally last week in stocks like GameStop.

AMC Entertainment,

and Bed Bath & Beyond. ‘So you know, it should really reduce the level of short interest rates. Once it’s covered, and not because they want to, but because they have to, who’s left? Who is the marginal buyer at that point? ”

On the WallStreetBets Reddit forum, the de facto hub of the GameStop retail investor movement, users are appealing to each other to buy the dip and to hold existing long positions. But at least one notable investor did not heed that advice.

Barstool Sports founder Dave Portnoy said on Tuesday he had sold all his “share in meme” – those that went viral on social media, rising further than the reasonable valuation calculated. Portnoy se pos unleashed people who say the stock could still rise, although he noted that he lost about $ 700,000 on such names.

Gary Black, who was a leading tobacco analyst for Bernstein in the 1990s and the former CEO of Aegon Asset Management, said on Twitter he believes the pressure is “completely different from hedge funds that have curtailed their positions, and other hedge funds, while the pressure is on other trades.” Black is also active on

Twitter

talking about electric vehicles.

Dusaniwsky calculates that people who have already borrowed and sold short GameStop shares pay a 19% loan fee. He sees new loan fees for shares between 10 and 20 percent. Higher fees are among the motivators that short sellers use to cover their positions.

Write to Connor Smith at [email protected] and Avi Salzman at [email protected]