The triple-digit percentage increase in the value of Truth Social (DJT) has led to a unique setup and a painful short squeeze. The meteoric price increase follows the rising odds of a favorable election outcome for former U.S. President Trump. The squeeze is more pronounced as candidate Trump maintains a significant ownership stake in the company he founded. The combination of his high percentage ownership and his never selling a share minimizes the actual stock available for trade in the marketplace.
The high short interest that began building in July and the limited shares available due to Trump’s position create a precarious setup for those who have positioned the stock short. With “blood in the water,” the company is attracting frenzied buyers among the ranks of investors and meme-stock traders.
Understanding Shorts and Short Squeezes
Shorting a stock involves borrowing shares from a broker and selling them on the market to buy them back at a lower price. The borrowed shares are then returned to the lender. The speculative short investor will profit or lose based on the difference between the initial sell ticket and the later buy ticket prices. A short squeeze occurs when a stock with significant short interest experiences a sharp price rise. This price action forces many short sellers to buy back the stock at higher prices to close their positions. This creates more sales and accelerates the price increase.
High Short Interest and Trump’s Holdings
Shares of Truth Social had become a popular target for short sellers for a number of reasons. One is skepticism over its business model, and the second and third are competition with Elon Musk’s X and regulatory challenges. The traders in these short positions seem to have overlooked Donald Trump’s significant holdings, which add up to 57% of issued stock. This massive amount is not likely to trade any time soon.
The large holding by Trump means a better mathematical assessment of short interest in DJT should exclude Trump’s shares from the outstanding float. For instance, if a 17% short interest and 50% of the shares will not be traded, it equates to a 34% short interest of available shares. The real numbers are actually worse for short sellers – they got caught.
Using TipRanks’ Stock Price and Analysis, we see that over the past five weeks, DJT has soared 390%.
Turbocharged Rally: Passionate Followers and Election Hopes
The rally in $DJT isn’t just market-driven; it’s politically charged. Trump’s many enthusiastic and engaged supporters view Truth Social not just as a stock but as a symbol of freedom worth supporting.
The anticipation of Trump’s growing probability of returning to the White House adds even more buyers and provides even more trouble to short sellers. For these players, DJT’s “free speech” platform isn’t just an investment; it’s support for their passionate ideals.
This sentiment continues to drive buying pressure, which further squeezes shorts.
Polymarket Odds as a Gauge
Polymarket is a prediction market where individuals can bet on the likelihood of real-world events. The odds provided by Polymarket for Trump’s re-election prospects serve as a proxy for market sentiment as it relates to DJT. As these odds have swung well in Trump’s favor, so did the optimism around Truth Social’s future. This led to a significant influence on stock price movements.
The Squeeze Intensifies
With each upward tick in DJT’s price, short sellers face mounting pressure. Margin calls could force them to buy back shares at higher prices. These forced purchases (short covering), in turn, push the price up further. This feedback loop leads to rapid escalation and an intense short squeeze. For DJT, this scenario is unfolding, driven by a mix of market dynamics and fervent political support.
Market Sentiment and Speculation
Market sentiment around DJT is divided. On one side, there’s a bearish camp betting on Truth Social’s failure, citing regulatory hurdles and market saturation. Conversely, there’s an optimistic view fueled by political events, user growth, and the sheer firepower of Trump’s brand. This clash of sentiments amplifies market volatility, perfect for today’s short squeeze.
Implications for Investors
For investors, the DJT situation offers both opportunity and peril. For those short DJT, the squeeze could mean significant losses. Conversely, there’s potential for substantial gains for long investors or those betting on the squeeze. However, the volatile nature of such investments calls for caution. Gains this big and this quick seldom hold.
Takeaway
The rally in Truth Social’s stock, driven by a unique blend of political zeal and market mechanics, exemplifies the unpredictable nature of investments linked to public figures. DJT’s rocketing upwards serves as a reminder of how intertwined finance and political outcomes can become. The current situation in Truth Social not only underscores the risks of shorting stocks with such strong backing but also highlights how market movements can be significantly influenced by abnormal factors like one person owning more than half the company or social media communication to drive herd behavior. As with all investments, especially those one may consider shorting, due diligence, and even visiting TipRanks to get top analysts’ perspectives, could lead to better outcomes.
