TL:DR - Biggest 1 day gainers tend to happen on lower float no dilution companies that are part of a sector move or experience drastic fundamental change.

In this article we will

Every few months, the small cap market experiences a surge in trading activity that is initially ignited by a mega squeeze.

2020-2021 saw a much higher frequency of such runners as a result of wider retail participation in the stock market.

In this blog post, we examine whether there are any commonalities between the so-called “black-swan” events, draw some practical conclusions on how to anticipate such runners, and see if potential dilution plays a factor.

Bubble size represents volume traded.

First, we define a mega squeeze as any stock in the past two years where its intraday high exceeded 500% of its prior day’s close, which results in a list of 77 companies.

A few runners may be missing from this list due to the data quality of our price data vendor. This list also excludes multi-day runners such as tickers that went over 500% over several days.

Full spreadsheet available upon request by premium subscribers.

Next, we look at the distribution of the basic stats of each company such as float, market cap, and price.

Estimated Float Value at the Time of Run

Plotting on a linear x-axis gives the below chart

This chart tells us as float value increases, runs become exponentially more rare. The statistically minded readers will recognize this as a log-normal distribution.

If we plot the same data on a log scale x-axis, we have the below chart.

Market Cap Prior to Run

Dollar Float Value Prior to Run

Previous Close

As expected, the majority of the biggest one day runners happen to be low floats under 8m shares, small companies under $25m market cap, and initial $ value of float under $25m. The initial starting prices were also all under $10, with the bulk under $5.

Nothing too surprising given that in theory, the smaller the initial $ float size, the more sensitive it is to incremental increase in $ demand; meaning the smaller the company, the less money inflow required to create a big % range move.

We expect that most companies in this list should have minimal dilution because any dilution that increases the float while the stock is running would hinder its positive feedback loop while it’s squeezing.

We went back and looked at the dilution profiles of each of the above runners to see whether there were any possible ways to dilute such as through ATMs, warrants, convertibles, equity lines, S-1 offerings or any room available on a shelf. The chart below summarizes the dilution ability of each company within the list.

The above chart breaks down the dilution profile by year, but in aggregate, 59% of companies had no method of dilution, meaning it had a clean capital structure, no S-1 offerings pending and no shelf room.

27.6% had low available dilution, which were usually companies that had <$2.5m available to raise through different means. A medium rating meant that the company had between $2.5m and and $25m of potential offer ability or meaningful overhead supply like warrants or convertibles relative to float. Four companies that were labeled high dilution were those with pending S-1 offerings, which tends to involve a pump and dump if prior float value is low enough (see our S-1 article for details).

Beware that the above stats doesn’t mean no or low dilution always leads to mega squeeze. There are plenty of low float and no dilution stocks that gap and fade for the entire day.

This sample cherry picks the top gainers first, which happened to have a lot of low or no dilution stocks. The above stats only tells us that they are likely the PREREQUISITES for the mega squeeze (i.e. 🍌all bananas are yellow, but not all yellow things are bananas🍌).

The above characteristics described so far all relate to supply side dynamics, namely limited initial supply and no means of supply increases.

However, low supply alone isn’t enough to cause a stock to go up. Market participants need a common signal before they congregate their buying onto a stock, which could start a positive feedback loop of buying frenzy.

The context also needs to draw in short sellers, namely situations that involve companies which appear massively overvalued. As you’ll see in the list below, they typically involve companies which were previously fundamentally unattractive.

There’s no clear cut definition of a “sector move”, but in general, it involves a multi-day to multi-month run-up of a combination of stocks that are all poised to benefit from a significant new macro tailwind or speculative trend.

These could be triggered by new technological developments, significant world changing events, material regulatory changes that increase the viability of an industry, or new consumer trends that create significant demand for an industry’s products.

Specific examples of some sector moves in the past include EVs, tertiary EV industries, cannabis, Covid-19 related therapeutics/vaccines, blockchain related industries, clean energy technology industries, etc.

Sector moves create the largest demand spikes because the exact upside is often difficult to quantify and the highest bidder will have outlandish projections about the companies’ future fundamentals.

If the float is limited, these optimistic bidders become the marginal price setter of the stock and the company may trade at elevated valuations for prolonged periods of time until such optimists change their view or new supply hits the market.

Many of these optimistic traders also tend to be swing traders while the intraday sellers providing liquidity are day trading short sellers, which could cause demand and supply imbalances to the upside if the shorts can’t hold overnight due to borrow constraints.

The sector move also doesn’t last forever, and many companies will try to pivot their business to the hot sector in order to raise some funds off the hype. Companies equally feel FOMO in seeing other companies raise millions to billions, and there will be no shortage of those looking for an easy cash grab. These late sector cycle companies may get a small pop but if the main sector movers are already in their downtrend, then the late pivoters’ pops will be short-lived.

From the list above, 25 or roughly ⅓ of the runners were caused by a sector move. In many instances, demand caused by sector moves is so high that even highly dilutive companies may see large increases in its stock price, albeit over a longer period of time.

We plan to go over in a future blog post about when dilution DOESN’T matter.

This context is harder to identify unless you have been following a company or industry for a long time and understand the key drivers of fundamentals. Some obvious examples include: positive development that causes a distressed company to no longer be distressed, a biotech priced for failure that suddenly shows promising data, a highly shorted company suddenly receiving validation through legitimate partnerships, a transformative acquisition, a company starting a roll-up strategy, and reverse merger with a more attractive target company.

In this situation, the equity is priced at a depressed valuation prior to the positive news and immediately becomes significantly more valuable due to new developments.

The change is so abrupt that the market may initially under-price the news as short sellers initially short the move thinking the company is still trash given its poor past performance.

The more distressed the equity was prior to the news, the bigger the potential move.

Similar to the sector move, if fundamental buyers plan to swing the stock while shorts are mainly day trading noise traders, then there will be supply and demand imbalances to the upside, potentially triggering a massive squeeze (think Covid-19 related biotechs, which was a mix of sector move and abrupt change in fundamentals).

After GME and AMC, most people now know about this context. Much rarer in small caps as most companies are on average too illiquid for market makers to make a market in options, but occasionally can still occur and is actually more extreme. Examples include SPRT, ANY, BBIG, NEGG, KODK, where under capitalized option sellers eventually got blown out and created artificial buying in the equity.

Abnormally high open interest in OTM calls relative to a company’s low float can trigger a highly reflexive process of buying begets more buying as a result of dynamic delta hedging by call sellers.

The lower the float, the faster the price moves relative to the incremental $ inflow, amplifying any movement and potentially triggering a massive short squeeze if there’s also high short interest in the stock.

This is a relatively new phenomenon as a result of a large number of SPACs approaching their merger voting dates. SPAC holders are allowed to redeem their shares for cash held in trust three business days prior to the merger vote.

If enough holders redeem (>95%), the post merger float will become abnormally small for a short period of time. The float remains small until the company files resale registration filings to allow any shares from the target or PIPE shares to be sold on the open market (typically within 1-2 months after merger, but could also be filed before merger closes).

Before new supply hits the market, the company will trade like any other low float. If there was any short interest that carried over after redemption, then there may be high short interest relative to float. However, once the shares from the PIPE or target are registered through form S-1, massive supply will hit the market and potentially put downward pressure on the stock price.

A stock could possess any mix of the above four contexts. The more it has, the higher the potential demand and ultimately a higher % range of a move. For example, KODK was a mix of the first three, namely it was i) a sector move because it pivoted to Covid vaccine manufacturing during the peak of Covid, ii) a complete 180 degree change in fundamentals because it transformed from a distressed film company to non-distressed (potential government funding), and iii) had prior high short interest plus liquid options which triggered a gamma squeeze. IRNT was a combination of the last two, where it was a highly redeemed SPAC with liquid options that also had massive OTM call buying. SPI, the biggest one day intraday gainer on record, was a highly distressed company pivoting into EVs.

The precise entry and exits on the long side will vary. Ideally, buying as soon as new information is out suggesting that the company is now part of a sector move or fundamental inflection has occurred would provide the lowest cost basis. However, the market can move fast as every other market participant is also looking for the same information, including algorithmic based systems. Other smart traders are also constantly scouring through companies ahead of time to anticipate the next sector move or hidden catalyst that could trigger fundamental change. Fortunately, sector moves and fundamental inflections can cause very large movements that could last multiple days to months, providing you with opportunities to add on earlier dips. The closer the entry is compared to the price prior to the fundamental change and the less volume traded since then, the less “premium” priced in for the setup.

The exit is also tricky because we cannot precisely predict when a feedback loop ends. Though these exhaustion points tend to involve an accelerated parabolic move with price peaking together with abnormally high volume. Sentiment is overwhelmingly bullish at the top and social activity is also at its maximum, indicating everybody that wants to buy is already in. Selling partial positions into parabolics is generally optimal. Other technical exit signals include key trend breaks or breaks on medium term moving averages such as the 200EMA on the 5min or 15min. Another important sell signal is when the company files related filings to do an offering or other forms of issuing additional shares. Additional supply can easily break any upward momentum effects and feedback loops due to low float dynamics.

Identifying situations where supply is limited with reflexive demand (Soros speak for self reinforcing, positive feedback loops) is the ultimate recipe to spot multi-baggers early on.

The earlier you can identify these situations, the higher the risk reward ratio because the trade is least crowded at the beginning. The list we provided includes only one day gainers and excludes many other great examples of multi-day runners that fits the supply/demand framework presented above.

We hope that this blog post provided you with some insight into generating a big picture trade thesis, whether it's making money on a swing long position or avoiding getting squeezed too early on a short position.

With Dilution Tracker data, you can quickly see if a company has the ability and desire to issue additional shares. Then, you can identify whether it has the potential to become a mega squeeze once it fits into any of the above scenarios.

If you would like to play with this dataset, Twitter dm/email/chat with us.

Cheers,

DT Team