|Wednesday, 22 August 2012 03:40|
The latest battle between longs and naked shorts may present traders another opportunity to benefit form being in the right trade at the right time.
On August 9th, we tweeted in anticipation of a big move on "no news" by Pluristem (NASDQ:PSTI). The stock looked primed to run based on our observation of heavy pre-market activity and it lead to an interesting conclusion which has since been confirmed:
There was a substantial amount of naked short covering by bankers and their "friends" and funds who had heard false rumors that PSTI was getting ready to do a major ($25 Million +) financing facilitated by all the volume and attention that the stock was attracting.
As we told our premium subscribers at the time, it has become common practice for many of these bankers and funds to position themselves in stocks "naked short" after hearing "through the grapevine" that firms may be getting ready to engage in dillutive financings. Even worse, they do this after they, themselves, are the ones approaching these firm with tempting offers to take their money after spotting increased volume and volatility in the stocks.
Solid sources told us days ago that Pluristem's management team coldly refused recent overtures from various big firms on Wall Street for such a financing. Given their current cash position, the firm did not feel the timing for a financing was appropriate or in the best interest of their shareholders. When PSTI management boarded a plane without signing a deal, all those naked shorts were sent scrambling to cover. We told premium subscribers that by our own estimates there could still be another a few million shares still "naked short" the stock. We advised that they should watch trading in order to see if "buying to cover" continued. It did. Over the next few sessions, the stock pushed higher- eventually hitting a 52-week high. Still, even as prices rose and hit $5, there was strong short pressure attempting to push prices down. They eventually succeeded (see marked chart below).
Desperate to cover at prices near the levels where they began shorting the stock, a perfectly timed article not based on a single fundamental or news driven fact appeared and helped scare and panic inexperienced retail investors into dumping shares. A look back at other similar recent articles, all by the same publication, shows that the timing for these might be motivated by short sellers and/or an attempt to manipulate prices. The "predictive doom and gloom" nature of these articles has not only been incorrect time and again, they have attracted the attention of regulators after multiple complaints from several firms and investors.
Before all this played out, we presented a solid thesis and felt strongly that shares were position for the next leg up and that a move into positive territory was extremely likely. The rare perfect storm gave retail investors an opportunity to beat the pros at their own greedy games. Now that the majority of those shorts have appeared to cover their positions at Pluristem, it seems that shares are starting, once again, to inch higher. We are, once again, accumulating at these levels in anticipation of a move higher. If, by any chance, there happen to still be any shares short the stock, those too will be forced to cover on any good news or buying pressure.
Keep an eye on PSTI.
Disclosure: Long PSTI
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