Long Squeeze

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Definition: Long Squeeze

Long Squeeze

Quick Summary of Long Squeeze

Situation in which investors who hold long positions feel the need to sell into a falling market to cut their losses, which leads to a further decline in market prices. Less common than the opposite, short squeeze.

Full Definition of Long Squeeze

A long squeeze happens when a sharp decline in the price of a stock or other asset results in additional selling. In a long squeeze, long holders of a stock are compelled to sell their shares in order to protect themselves from a catastrophic loss.

  • A long squeeze happens when selling prompts additional selling, hence feeding a cycle and a significant price drop.
  • Long squeezes are more prevalent in assets that have experienced a big price increase, with extremely large volume occurring when the price reverses, as well as in equities with little liquidity or float.
  • Value investors and traders seeking oversold situations will be on the lookout for and buying long squeeze stocks.

Contrast the long squeeze with the more well-known short squeeze. Long squeezes are more likely to occur in illiquid equities, where a few zealous or panicked shareholders can generate unjustified price volatility in a short period of time.

Short sellers can temporarily monopolise trade in a stock, resulting in a sharp decline in price. Long squeezes, on the other hand, require enough fear to set in that long holders begin to liquidate their positions as well. A prolonged squeeze, without a fundamental reason for the selling, may endure for an extended period of time or be quite brief. Once the price falls to a level judged “too low,” value buyers or short-term traders on the lookout for oversold conditions will jump in and bid the shares back up.

Long squeezes can occur in any market, but are often more dramatic in markets with little liquidity. While liquidity is important, technical variables, supply and demand also play a role. A stock that has been rapidly rising becomes increasingly susceptible to a long squeeze, even more so if the volume is really high as the price begins to fall. If the price falls dramatically, those those who bought near the top will begin selling in droves. Many just cannot afford to hold onto the loss, even if they believe the price will eventually return to present levels, or higher.

Value-oriented investors and value investing styles have long been the go-to remedy for oversold securities. Recognizing the possibility of a long squeeze, value and deep-value investors are generally quick to react to stocks that may be trading at discounts to their true intrinsic value. If a stock does not recover from its decline, it is likely that there was a fundamental reason for the sell-off or that the stock was overpriced to begin with. In this case, the selling was reasonable and justified, and it was not a long squeeze.

When long squeeze situations occur, they are typically concentrated in stocks with a small float or market capitalization, or the selloffs in these stocks can be quite dramatic. These small or even micro-cap securities do not always have a healthy level of liquidity that can support price levels in the face of irregular trading volumes. A quick trader or automated trading system can seize an opportunity to profit from a long squeeze before others return the stock to its oversold state.

The float of a stock is determined by the number of shares that are actually available for trading, as some securities are held in treasury or by insiders. Stocks with a small float are prone to natural squeezes from either the long or short side. Fewer participants control the shares and thus the share price in these types of stocks. A large sell order from a large trader can set off a chain reaction of selling. When compared to a highly liquid stock with millions of shareholders and millions more actively interested in purchasing the stock, long squeezes are less severe.

Related Phrases


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Definition Sources

Definitions for Long Squeeze are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 13th April, 2022 | 0 Views.