blue and yellow graph on stock market monitor

Support.com stock surged from $9 at the beginning of the week to a high of $59.69 during Friday’s trading session. So what caused the stock to rise more than 560% in five days and what can we expect next?

Acquisition

Support.com is a technical support company for businesses and consumers based in the US. Earlier this year in March the company announced a merger deal with Bitcoin miner Greenidge Generation to take them public. The shareholder vote for this will take place on September 10th. Bitcoin and related mining stocks have changed to a bullish sentiment in recent weeks, with significant gains seen across the board and Bitcoin itself nearing $50k. This crypto related news has been a positive tailwind and a key factor in helping the recent Support.com rally.

What is a short squeeze?

“Short squeeze” has been a term I have heard far too many times across social media platforms ever since AMC Entertainment and GameStop started the meme stock frenzy in January of this year. But what is a “short squeeze”?

In trading, you can either go long or short on a trade. Going long on a trade is what most people think of when you mention trading. It involves buying a stock at a lower price, and selling it at a higher price to make a profit. Going short, or shorting, is the opposite. You make money when a stock decreases in value. It involves borrowing and selling someone else’s shares with a view to buy them back (called “covering”) at a cheaper price. You then return the shares and pocket the difference.

Since the crazy rallies in January, looking at the short interest (the percentage of shares that have been sold short but not yet covered) has been a hot topic. Everyone loves quoting a high short interest (anything above 30%) and believes that stock will “squeeze”, but it rarely does, and definitely not to the level that AMC and GME did. “Squeezing” is the idea that when a stock starts rising a lot in price, the traders shorting the stock are losing money so will close out the position. But covering a short position involves buying, so there is more demand to buy the stock, and the prices go even higher. This leads to even more short sellers losing money and covering their position and more buying etc.

The result

Support.com stock was 60% short interest, largely hedge funds on Wall Street. It had acquisition news relating to Bitcoin and crypto, an in-demand sector. It also had social media talk, especially from the likes of ‘WallStreetBets’ on reddit. This led to many traders buying the stock in hope it would squeeze. And squeeze it did. 560% in five days.

What next?

Lots of traders are involved, most likely many new traders who like to jump on social media trends and buy shares when they are already at very high prices. Often, they are also unlikely to sell these shares in hope of more short squeeze action. Hedge funds may be underwater. If they had shorted at $9, they now owe $26 (price at close on Friday). Now think about the size and leverage that these hedge funds trade with, and losses can quickly become exponential.

For the next few days I can see the prices being very volatile. It will depend if retail traders sell, and the prices go back down. Or the hedge funds cover and the prices go even higher. History tells us that Wall Street rarely loses. Personally, I would not be trading the stock at this point. It is far too volatile to have a good risk to reward. But it will be entertaining to watch the support.com stock play out.

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