• Research

Feb 16, 2018

S3 Analytics: Fossil Short Squeeze Just More Fake News

On February 14th jewelry and watchmaker Fossil Group’s (FOSL) stock price opened up 78% as they announced better than expected fourth quarter earnings. At the time short interest was 46% of the float and both analysts and the media immediately called the move a short squeeze. As is usually the case, when villagers continue to cry wolf, there was some short covering but in no way was there a “short squeeze”. Fossil’s price move on the open was due to unbalanced bid/ask order flow on the news and not a prolonged run of “buy to covers” forcing the stock price up.

A “short squeeze” is generally defined as a significant increase in a heavily shorted security’s price which forces short sellers to cover their positions to cut their losses which creates further upward pricing pressure on the security.

Fossil’s stock price spiked on the open, with an opening print that was up over $7 from the previous day’s close – while there were covering bids from short sellers in the trading queue which helped drive the opening price up, the stock price move was not due to a flurry of short-side executed “buy to cover” orders. Fossil’s price move was primarily due to long-side buyers and sellers, not short-side buyers and sellers – this was, as usual, not a “short squeeze.”

In order for there to be a true “short squeeze” the total shares shorted in a stock would need to decrease. As we see in our data, Fossil’s shares shorted have not decreased significantly since the 13th, and after some minimal short covering on the 14th we are seeing an increase in short selling on the 15th and 16th. The net “buy to covers” on the 14th is a drop in the bucket compared to the 42.1 million shares traded on that day and could not be responsible for Fossil’s 88% overall price move.

The 17-18 million shares of longer term Fossil short sellers, who were in the name since the 4th quarter of 2017, are mainly value investors who shorted Fossil based on expected decreasing of overall sales, the possibility of disappointing gross margins, and severe competition in the smart-watch sector. The remaining 1.5-2.5 million Fossil shares shorted were short-term traders getting short exposure to the stock ahead of its earnings release in search of a quick negative price move. While a large portion of the short-term money did buy-to-cover after getting blindsided by better than expected numbers, the value based short sellers actually shorted additional shares into the day-long rally and are continuing to short stock as its price retreats from its February 14th highs. I would expect that Fossil shares shorted should hit 20.5 million shares by early next week.

In conclusion, not only was that not a “short squeeze” in Fossil stock, we are seeing an increase in short selling. While analysts continue to call positive price moves on heavily shorted stocks “classic” and “technical short squeezes” or “believe the stock – which his heavily shorted – is up on covering”, they are basing their calls on “market sentiment” but not actual short-side trading data. It is rare to see a true “short squeeze” and most large negative price moves are due to long shareholders selling their stock and creating a tidal wave of momentum based selling from both active short-term investors and the more passive Fund and ETF longer-term investors. It simply takes less effort and is a much better sound bite to just blame the shorts. It usually isn’t the short activity that is responsible for these large price moves, long daily trading volume far outpaces short activity on any given day. The informed investor should be making trading decisions based on of data driven short-side analytics not the hunches and gut feelings of analysts and media talking heads.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

To learn more about S3 Short Interest data, BLACKLIGHT Treasury Management, and Counterparty Risk Solutions, click here

To trial the S3 BLACK APP – the Definitive Source of Real-Time Short Interest - type APPS BLACK <GO> on the Bloomberg terminal

The BLACK APP is now available on Thomson Reuters Eikon! For a free trial, go to the App Library and open the App Studio