Fishing for liquidity Imagine being a farmer looking for water. You start digging a well. 10 meters deep no water, 20 meters deeper still no luck so you keep digging deeper and deeper hoping to find enough water to justify the investment and time spent digging. Now imagine a bunch of short sellers who sold millions of shares short and are digging/fishing for stop loss orders or people who will be forced to sell at a certain price (those who bought on margin and can't honour repeated margin calls for more cash as the price keeps going down…) that will allow them to cover their shorts. Short sellers will do anything to push, force or convince you to sell because they are sitting on millions of shares that they must buy to cover their short positions.
Imagine that I assume that there are enough shareholders that will be shaken out if the price is low enough.
What happens when a “strong invisible” hand meets weak hands?
“Imagine” a market where there is one strong hand representing smart money and 20,000 weak hands representing fearful money. The strong hand knows the game of shorting stocks both directly (2 to 5% of float) and indirectly using put options 95 to 98% of float) and has been playing it for decades squeezing the weak hands. The ruse goes like this:
- They dump a large order of 50 million shares for $6 a share
- A few months later they sell short another 30 million shares for $5 a share
- A few months later they sell short 10 million shares for $4 a share
- A few months later they sell short 5000,000 shares for $3 a share
- A few months later they sell short 3000,000 shares for $2 a share
- A few months later they sell short 2000,000 shares for $1 a share
- At the end of this special operation (bear raid) spanning many years the strong hand would have sold short 100 million shares for $513, 000,000 ($5.13 per share on average) bought by some 20,000 retail investors who are now faced with two options :
- 1- Surrender to the shakeout and sell for $1 and realize your loss.
- 2- Realize you are the target of financial bullies fishing for liquidity and hold the line until short sellers get squeezed when the business cycle turns
If all hands are weak and sell at $1 the strong hand walks away with over $400 Million dollars. It is a big game that is why they can afford paid bashers spreading fear all day every day.