The stock market isn’t something I understand very well. I’m trying to understand something I read here about a biotech company.
I think I understand the last line. If the price goes up because of good drug trial results, the folks who shorted will want to get out quickly and minimize their losses. This means buying back the stock they borrowed. This increased demand to buy raises the price even further.
It’s the line before that which I don’t understand. If the stock goes down because of bad drug trial results, it seems like short sellers would also want to get out so as to lock in their winnings, not give it time to recover. So wouldn’t that desire to exit their short positions also put upward pressure on the stock?
For what it’s worth, in the time since that was written it came out that the phase 3 results didn’t look great, and the stock did drop a lot. I’m just trying to understand what the role was of the large number of short-sellers in contributing to this.
You understand it just fine. The writer is speculating that if the phase 3 results were bad, lots of people would sell the stock, pushing the price down even further. This would likely be a combination of current stockholders who are now pessimistic about the company and new short sellers who are just taking the opportunity to profit from this company’s misery. Either way, the result is the same – bad news creates new sellers and pushes the stock price down.
The early short sellers are likely to buy into the drop to lock in their profits but their buying will likely be more than offset by the selling of other investors looking to get out or take new short positions. So bad news still causes stock prices to drop despite the high short interest.
I agree with the OP. The lines he quoted make no sense as written.
It doesn’t make sense to say “So if phase 3 results don’t look great, it’s going to drop…”. The fact that there are any number of current short sellers is not a reason for the stock to drop further if the phase 3 results don’t look good. The opposite, if anything.
I suspect that the writer may meant to say that the fact that so many people were betting that the drug is going to fail suggests a high possibility that this will indeed happen. But that’s not what he wrote, so the line is poorly written at best.
Covering a short position always involves buying the stock, so if the number of shorts is decreasing for whatever reason (either to lock in profits after a fall, or avoid additional losses after a rise) it will cause the price to increase (or at least decrease less than it would otherwise).
A short price rise after a big fall, attributed to short sellers closing out their positions is whimsically called a dead cat bounce.