The shares of Trump Media have surged by triple digits in approximately two weeks, marking a significant reversal from the bearish trend following its highly anticipated IPO.
- DJT shares surged 120% since mid-April, hitting $50 per share, partially reversing a sharp decline post-IPO.
- Despite weak fundamentals, DJT’s trading mimics meme stock volatility, fueled by speculation around factors like Donald Trump’s involvement.
- DJT faces a potential short squeeze as it approaches its IPO debut price. Technical signals indicate uptrend strength, and high borrowing costs hint at intense shorting demand. Allegations of naked shorting and soaring FTD figures raise manipulation concerns.
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Trump Media short squeeze setup
Shares in Trump Media (NASDAQ: DJT) have been surging since the second half of April. They have risen by approximately 120% since April 16th, reaching $50 per share at the time of writing.
However, this appreciation only partially reverses the sharp decline that DJT stock experienced after its highly anticipated debut on the stock market, when it traded above $66 per share.
Trump Media’s trading performance has resembled that of a meme stock, where intense volatility has been driven not necessarily by its business fundamentals (which are pretty fragile, by the way) but rather by speculation surrounding various factors connected to the stock, mainly the figure of Donald Trump, the company’s main shareholder.
Upon its debut, Trump Media was valued highly. Many market participants recognized the obvious overvaluation of a social media company traded at a market value of $8 billion while generating only $4.1 million in revenues in 2023. Consequently, they decided to short-sell DJT shares, betting that this asymmetry would eventually be corrected in the market.
Their assumptions seemed justified initially, as shares plummeted by 65% from the debut on March 27 to April 16, when DJT was trading at $22.55 per share. Weak business fundamentals and news of the company issuing more equity – leading to dilution – weighed heavily on sentiment, causing the stock to plummet.
The pressure to sell DJT was apparent as demand for shorting the stock collided with the availability of shares for lending. With roughly 27% of the company’s total shares available to the general public, the limited float led to borrowing costs exceeding 700%.
Although there was a 7% short interest in DJT by mid-April, the astronomical borrowing fees highlight the significant demand for shorting and the potential risks involved if there were an uptick in the share price.
This scenario could lead to an explosive situation for short sellers. Short-selling expert Ihor Dusaniwsky of S3 Partners says, “If DJT starts rallying, you’re going to see the mother of all squeezes.” As DJT shares inch back toward their IPO debut price, short sellers could rush to cover their positions, potentially causing a massive squeeze.
DJT has become a lucrative stock for traders looking to profit from momentum. Technical indicators suggest that shares are heading back towards the IPO debut price. The crossing of the 50 SMA above the 100 and 150 SMAs on April 24 suggests that the strength of the uptrend is increasing over multiple timeframes. Many traders and technical analysts view this pattern as a potential buy signal, indicating an opportune moment to enter long positions in the market.
Market sentiment indicates that buying pressure is unlikely to cool at current levels, and the IPO price is unlikely to be the target. Given the borrowing fees at 700%, it’s highly likely that many short sellers will not be able to hold their short positions for much longer.
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Naked shorting or simply increased volume?
Trump Media stated the market alleging that it is a victim of illegal trading practices, such as naked shorting, as the company appears on the Regulation SHO list. This list comprises stocks under regulatory scrutiny for suspicious trading activities.
Subsequently, Trump’s company issued another statement advising shareholders to protect themselves from potential illegal practices by keeping shares away from brokers and registering them directly with the company’s transfer agent. The rationale behind this move is that the transfer agent, theoretically, cannot lend shares to short sellers.
Naked shorting occurs when an investor sells shares they don’t own, betting on the price of those shares to fall. If these shares are not delivered within the settlement period, it results in a failure to deliver (FTD). In other words, the seller fails to fulfill their obligation to deliver the sold shares to the buyer within the stipulated timeframe.
The latest FTD figures from DJT are staggering. Recent data shows that more than 700 million FTDs have been recorded in recent weeks, a significant increase compared to 210 million on March 24 (pre-merger).
While this may suggest the possibility of naked shorting, it’s also plausible that the high cost-to-borrow ratio, resulting from the market’s strong demand for DJT shorting combined with its extremely low float, could contribute to the rise in FTDs. A CTB rate of 700% indicates a significant increase in the time needed to process transactions compared to normal, possibly indicating network congestion, lack of processing capacity, or other technical issues slowing down transaction processing.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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