What is Short Pressure Rating?
Short Pressure Rating represents a variety of indicators of whether a stock is being shorted. Shorts are bets that the stock will go down and are a loan instrument. When someone shorts a stock at $10 they are given $10 and agree to a specific borrow rate on that contract; in this case let's say it's 10%. If that short was held for a year and the stock went to $5, the position (loan) could be closed for a profit of $4. The shorter will buy the stock at $5 and return it to “close” the contract but they also must pay $1 for the 10% interest for the $10 they borrowed to short the stock, thus they were given $10 and spent $5 to close the transaction leaving them with $5 - $1 in interest = $4 of profit. The primary indicator of short pressure is the borrow rate as the more a stock is shorted the more the demand to short the stock goes up and the higher the rate shorters will be charged to short that stock. Other important metrics are the % of shares shorted relative to total shares available as well as price and volume movements. Fast movements in price and volume can vastly increase the short pressure on the stock as losses from price gains can put pressure on shorters to cover.
How to use Short Pressure Rating?
A high Short Pressure Rating (80 and above) indicates that a stock is currently being heavily shorted and could sharply moves up or down either as the result of buyers piling in to cause a short squeeze to rocket the stock or shorters aggressively trying to push the stock down to make gains and scare away buyers. A low rating (20 and below) indicates that there is very little short activity on the stock and is a safer bet for stability and lower volatility.
Hunting for stocks with short squeeze potential can be highly profitable for investors but it is also important to remember that heavily shorted stocks got that way for a reason and they likely have some risks to their business. If a company has a higher Short Pressure Rating and registers favorably in our long-term predictions that could be a good risk/reward investment, especially those with high Profitability, Upside Breakout and to a lesser extent Growth. It is important to remember that if a stock does not have the best fundamentals and you believe investors are valuing the stock as a short squeeze more than a long term investor, the success of this investment depends on the resolve of your fellow investors to hold the stock and outlast the short sellers. There is no timeframe in which short sellers have to cover, so this kind of investment is a test of wills.
Update Frequency and Usage for Short Pressure
Short Pressure Rating updates 4 times during market hours. Because of this you can generally count on it to include timely information to trade on. Big moves in short pressure could certainly mean the stock is about to swing in one direction or the other so it is great to watch over the course of the day.