Shares of Quicksilver, Inc. ($ZQK) are down 60% for the year and much of that in the last few weeks. The question for me is how and why would you short a stock under a dollar? The odds are terrible because the loss on the upside if you are short at one dollar is unlimited, so I ask the question again, why would you short a stock at $0.99? I would – and I have.)
I would short at a stock at one dollar if I thought it were going to zero. It would not be easy getting a borrow after the market closes today. It may be difficult, it may be impossible, but this is essentially what you would call naked short selling.
But first let's look at where traders are currently short - and I calculate back of the envelope at around $4.50 average. If they have any kind of position at all, it would have been from June 2014, and after carrying this from before the market broke down from six dollars, they fell abruptly in a matter of minutes to $3.50. Today, the stock is at $0.90, and the shorts are asking if they are willing to be a seller into weakness, and I can tell you the answer is a resounding yes – the daily volume will tell you that you’ve got buyers exiting and sellers pressing. It is called the death spiral.
Portfolio managers who aggressively short small cap stocks are fleet footed nimble archers, and they have Quicksilver squarely in their sights freefalling into a finishing spiral, taking her down for good. This apparel seller may see few quarters as a public company - but not many remain. The exchanges will see to that - as will the relentless short selling PM's.
Another Small Cap Apparel Retailer Headed to Zero
Quicksilver is in a parallel spiral to where American Apparel Inc. ($APP) was a month ago, and today the short sellers that feasted on lower guidance, lack of business and bad management claimed another. Quicksilver today was down 40% at last glance, trading nine million shares when on a normal day it trades one million. This tells you that too many people are trying to fit through the door.
News cannot always be good in the stock market, but when companies fall below a dollar we tend to look at it as a crash on the side of the highway with lights flashing. But the short sellers out there in small cap seek these flashing lights as an opportunity, and most likely they have been short all along, and are adding today as all hell breaks loose. They knew this crash was going to happen long before today, and they will be there at the end to collect the winnings. Shorting at one dollar is tricky. I would rather be short from higher and add to the short - selling into weakness - adding to the death spiral. This is what is happening today in Quicksilver - the final stages before the imminent crash to zero.
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