Stock Of The Day: Is The BigBear Short Squeeze Over?

BigBear.ai Holdings, Inc. (NYSE:BBAI) is our Stock of the Day.

The company’s shares were flat on Friday and there is a good chance they will trend lower.

Stocks that go through short squeezes tend to make rapid and extensive moves lower. As you can see on the chart, this is what happened with this stock in February, and it could be happening again.

Short sellers believe a stock will decline in value. They borrow shares from someone and sell them. Their plan is to buy the shares in the future at a lower price, return them, and keep the difference.

If a stock rises, short sellers incur a loss because they must repurchase the shares at a higher price than they originally sold them for.

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Sometimes, when a stock trends upward, some of the short sellers start to worry. Some go to buy their shares back before their losses become too big. This makes the price move even higher.

At this point, other worried short sellers buy, and this adds fuel to the rally.

If the price gets high enough, the people who lent the short sellers their shares will call in their loan so they can sell them. The shorts who borrowed their shares are forced to go into the market and buy regardless of the price. They have no choice but to do so because it is a legal obligation.

This drives the stock higher and can cause short sellers to enter a buying panic. The stock can experience a significant and rapid upward surge.

When the panic subsides, the stocks can drop right back to where they were when the squeeze began. This is what happened in February. BigBear dropped by more than 60%.

It's already dropped by about 25% in two weeks. If history is a guide, there could be additional losses ahead.

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