Forced Short Covering: Using Covering Pressure to Pick Short-Squeeze Candidates
TL;DR: Forced covering of short positions happens twice a year, and you can pick squeeze candidates by covering pressure (short interest as a share of the 5-day average volume, with 50% or more counted as high), but exclude stocks with convertible-bond arbitrage, and take profits on longs early because the final covering day is not necessarily the biggest rally.
Key ideas
- Forced short covering usually happens 2 times a year: 2 months before the shareholder meeting and before ex-dividend. The final covering day is 6 business days before the share-transfer freeze, and the stock-lending halt notice list is published very early; late March to early April is one wave of covering.
- Covering pressure is the speaker's own indicator, equal to short interest divided by the 5-day average volume, with 50% or more counted as high. Preferred picks have concentrated holdings, large short interest and a steeper chart trend; after the covering day things return to normal and the stock may fall.
- The final covering day is not necessarily the biggest rally, because major players also know that only that day has buying demand, so the move may start earlier. A Bitcoin-concept stock surged from 25 to 420, with the peak on the day after the covering day when brokers covered on shorts' behalf, then fell from 340 back to 100, so you can exit longs once they are profitable.
- High covering pressure does not mean safe: Kaiying (嘉穎) had covering pressure as high as 296%, but it has issued convertible bonds and offers arbitrage room, so shorts can return shares by converting and pose no threat. Look instead for stocks with no convertible bonds and few remaining trading days.
- This year the Russia-Ukraine war pushed many stocks lower in March, so fewer targets have strong covering pressure. The covering wave before shareholder meetings may not be strong, but a second chance comes before ex-dividend.
Section summaries
3:30Opening and Short-Selling Basics
The opening says this season goes deeper into past lessons and follows how chip flows change with the seasons; the market is now facing a wave of forced covering, and when shorts are forced to cover, a short squeeze can actually build. It then explains short selling: you borrow shares from a broker to sell without owning them, the opposite of margin financing, where you borrow money to buy shares.
▶ Watch from here3:55When Forced Covering Happens and How to Check
Covering a short means buying shares in the future to return to the broker. Forced covering usually happens 2 times a year: once 2 months before the shareholder meeting and once before ex-dividend, with occasional ones for cash capital increases or extraordinary shareholder meetings. The final covering day is 6 business days before the share-transfer freeze, so around late March to early April there is a pile of forced short covering, and the exchange publishes a stock-lending halt notice list in advance.
▶ Watch from here5:35Example of the Halt Notice List
The stock-lending halt notice list announces forced covering dates very early. For example, the final covering day for Everlight-type name Guangqun Lei is the 21st, and it also lists stocks such as Catcher and Dun Yang Technology, so investors can plan ahead, which leads into the short-covering pressure calculation next.
▶ Watch from here6:05Defining Short-Covering Pressure
Short-covering pressure is an indicator the speaker defined himself, equal to short interest divided by the 5-day average volume, showing how much of the 5-day volume short sellers must cover. Preferred picks have concentrated holdings, large short interest and a steeper chart trend; with high short interest and low margin-financing balance, the short-to-margin ratio is very high, shares become hard to borrow, and covering pressure is stronger.
▶ Watch from here7:10Squeeze Strategy and Short-to-Margin Ratio Standard
Before the forced covering day, short sellers must cover early, and you can use this rule of the game to go long on squeeze stocks; after the covering day, things return to normal and the stock may fall. A short-to-margin ratio of 30% or more is usually counted as high, and the speaker has even seen 560%, which means shorts are trapped. He gave an example of a stock that was locked limit-up right after being shorted; the next morning at the open it asks whether you want to cover, and if you don't, it locks limit-up again. The first few days before covering are especially strong; the steeper the chart trend, the stronger the covering pressure, while a bearish chart is weaker.
▶ Watch from here8:51Reminder on Timing Around the Covering Day
Covering pressure of 50% or more is counted as high, and the higher the ratio, the stronger the pressure. But the final covering day is not necessarily the biggest rally, because major players also know only that day has buying demand, so the move may start a few days earlier; so you can exit longs once they are profitable, without waiting for the last day.
▶ Watch from here9:51Classic Review: The Bitcoin-Concept Stock Rally
A review of the classic Bitcoin-concept stock rally: Bitcoin is hyped roughly every 4 years, and the stock rose along its moving average, surging from 25 to 420, which the speaker calls super outrageous, and uses this as background for the later short-covering cases.
▶ Watch from here10:25Analysis of a Forced-Covering Case
On the covering day most people cover obediently, and those who don't are covered by the broker the next day; that day's 420 was the price at which the broker covered, much like a forced liquidation. Many who covered at 420 were unwilling and wanted to short again, but short selling is not allowed during the forced-covering period and there are no stock futures, so they could only buy worthless put warrants; when shorting became possible again the stock was at 340, 80 lower, and it later fell back to 100, which can be described as first squeezing the shorts, then crushing the longs. The speaker then uses Huaxing (華興) and Zhonggui (中貴) as examples: during the rise, short interest dropped sharply, which fueled the rally, and Zhonggui had its stock lending halted for 3 days at one point, forcing covering at the high. The speaker's conclusion is that short selling has many restrictions and no rights.
▶ Watch from here14:05Picking Targets by Covering-Pressure Ranking
The speaker compiled short-covering pressure into a ranking, reviewed each stock's covering pressure one by one, and demonstrated stock picking starting from the stock most recently ranked first.
▶ Watch from here14:15Kaiying Case: Convertible-Bond Arbitrage
First-ranked Kaiying (嘉穎) has 478 lots of short interest but very low 5-day average volume, so its covering pressure is as high as 296%, far above the 50% high standard. But Kaiying has issued convertible bonds whose market value is about 150, leaving arbitrage room; the shorts are locked in for arbitrage, and they can return shares simply by converting the convertible bonds into stock, so no forced covering is needed. The speaker says that when the convertible bond's market value is above 130 there is usually no covering pressure, so even with a very high ratio, don't consider it for now and look instead for stocks without convertible bonds.
▶ Watch from here15:41Picking Squeeze Targets and Arbitrage Practice
You should pick stocks with no convertible bonds and few remaining trading days, because the fewer the remaining days, the more certain the covering. The speaker also shares a small arbitrage he does every day: after buying convertible bonds he converts them into shares and sells, because the selling price in the market is better and the stock has a high dividend yield, so he is not afraid of declines.
▶ Watch from here16:51Market Impact and the 2 Covering Opportunities
This year the Russia-Ukraine war pushed many stocks lower in March, so there are fewer cases like the earlier ones where a stock halved and was then forced to cover, and one can only find targets with weaker covering pressure. Short-covering waves come 2 times a year; because the market is poor, the covering before shareholder meetings may not be very strong, but there is still a second wave before ex-dividend, so you can start learning now.
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