Making the Short-Squeeze Case for Social Media Stocks

Social media stocks are heavily shorted, despite the sector's strong price performance

Feb 2, 2017 at 11:44 AM
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Social media stocks are in the spotlight, with Facebook Inc (NASDAQ:FB) touching a fresh record high after the company's quarterly earnings, and results from embattled Twitter Inc (NYSE:TWTR) due before the open next Thursday, Feb. 9. Social media's price action is tracked in the Global X Social Media Index ETF (SOCL), with the exchange-traded fund trading up 0.9% at $23.84 -- widening its year-over-year advance to 33.7%. Plus, the shares have now edged past the $23.70-$23.75 region, home to a 50% Fibonacci retracement of the ETF's late-2016 decline.

socl daily since february 2016

Against this upbeat technical backdrop, SOCL has turned in one of the best year-to-date performances of all the ETFs we track -- up 10.3% in 2017, thanks to a late-December bounce off familiar support at the 200-day moving average -- via the internal Sector Scorecard compiled by Schaeffer's Senior Quantitative Analyst Rocky White. More broadly, eight of the 11 stocks we follow under the "social networking" umbrella are trading above their 80-day moving average.

Nevertheless, there's ample skepticism levied toward the sector. Despite a broader decline in S&P 500 Index (SPX) component short interest, the bearish bets on SOCL shot up more than 158% in the most recent reporting period alone. What's more, short interest is now docked at levels not seen since October 2014. At the ETF's average pace of trading, it would take nearly six sessions to cover these bearish bets, meaning there's ample sideline cash available to help fuel SOCL's fire.

Drilling down, Chinese social media name Weibo Corp (ADR) (NASDAQ:WB) and online review forum Yelp Inc (NYSE:YELP) are two SOCL stocks that could be ripe for a short-covering rally, too. WB, for instance, is up 240% year-over-year. A recent pullback from the stock's Oct. 10 record high at $55.93 was quickly contained by its 160-day moving average in late December. A sharp rally off this rising trendline has WB stock up 20.4% year-to-date, last seen trading at $48.86.

YELP has surged 120% over the past 12 months. Today, in fact, the shares topped out at a fresh annual high of $43.41, and were last seen trading at $43.06. Additionally, YELP is comfortably on track to notch a second straight weekly close north of its 140-week moving average, a feat not accomplished since early 2015.

In spite of these technical achievements, WB and YELP are heavily shorted stocks. Short interest on WB jumped 20.8% in the two most recent reporting periods to a record high 8.7 million shares. And while short interest on YELP declined 10.5% in the same time frame, these bearish bets still account for a healthy 9.4% of the stock's available float. Considering it would take more than six sessions for WB shorts to cover -- and nearly four days for YELP shorts -- at the stocks' average pace of trading, there's plenty of buying power sitting on the sidelines to translate into tailwinds for shares of Weibo Corp and Yelp Inc, the latter of which is scheduled to report earnings after next Thursday's close.

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