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Long Squeeze: What Is It and How Does It Influence the Market?

Plus500 | Tuesday 28 May 2024

Understanding the intricacies of market phenomena is essential for investors navigating the complexities of financial markets. One such phenomenon, the Long Squeeze, represents a scenario where a sudden downturn in a stock's price prompts a cascade of selling, particularly among long-term investors. This article delves into the concept of a Long Squeeze, exploring its causes, implications, and how investors can identify and respond to it. By shedding light on this dynamic market event, investors can gain valuable insights into navigating market volatility and making informed investment decisions.

Long Squeeze: What Is It and How Does It Influence the Market?

What Is a Long Squeeze?

A Long Squeeze happens when a sudden decline in a stock or asset's price triggers more selling, forcing long-term holders to sell their shares to avoid significant losses. This phenomenon is more common in assets that have experienced substantial price increases, particularly in low liquidity or low float stocks. Unlike Short Squeezes, where short sellers drive prices up, Long Squeezes are fueled by panic among long-term investors.

In a Long Squeeze, panic sets in among long holders, leading them to offload their positions. This selling pressure exacerbates the price drop, creating a cycle of further selling. Value investors and traders on the lookout for oversold conditions often intervene by buying stocks affected by Long Squeezes, driving prices back up.

Long Squeezes typically occur in illiquid stocks, where a few determined or panicky shareholders can cause significant price volatility. While liquidity plays a role, technical factors and supply and demand dynamics also contribute to Long Squeezes. Stocks experiencing rapid price increases are particularly vulnerable to Long Squeezes, especially if the volume is high when prices start to decline. (Source: Investopedia)

A Long Squeeze in Trading

Value-oriented investors are often quick to identify and respond to Long Squeeze scenarios, seeking stocks trading at discounts to their intrinsic value. However, if a stock fails to recover from its decline, there may have been fundamental reasons for the sell-off, indicating that the selling was justified and not merely a result of a Long Squeeze.

Long Squeeze situations are most concentrated in stocks with limited float or market capitalization, where selling-offs can be particularly dramatic. These small or micro-cap securities often lack sufficient liquidity to support stable price levels during irregular trading volumes. Stocks with limited float are especially prone to Long Squeezes, as a large sell order from a major trader can trigger a cascade of selling.

The float of a stock, representing the shares available for trading, influences its susceptibility to Long Squeezes. Stocks with limited float are more vulnerable to manipulation, as fewer participants control the shares and, consequently, the share price. In contrast, highly liquid stocks with numerous shareholders tend to experience less severe Long Squeezes due to the broader base of trading activity.

In summary, Long Squeezes occur when a sudden drop in a stock's price prompts further selling, typically driven by panic among long-term investors. These events are more common in assets that have seen significant price increases and are exacerbated in low liquidity or low float stocks. Value investors often capitalize on Long Squeeze opportunities by buying undervalued stocks, while stocks with limited float are particularly susceptible to such squeezes due to their vulnerability to manipulation.

What Is a Market Squeeze?

The term "squeeze" refers to different financial and business scenarios marked by market pressure. In business, it can signal tough times like difficulty in borrowing or declining profits due to rising costs or falling revenues.

 In investments, it may signify short sellers buying stock to cover losses or investors selling long positions to secure gains. 

Profit squeezes, credit squeezes, and Short Squeezes are examples of market pressure intensifying financial situations. Squeeze scenarios often worsen due to negative market feedback loops.

Long Squeeze vs. Short Squeeze

A Short Squeeze and a Long Squeeze are two phenomena in the equities market that involve significant shifts in stock prices and trading volumes, albeit in opposite directions. 

A Short Squeeze typically occurs when the price of a stock rises sharply, leading short sellers to exit their positions to cut their losses. This increased buying activity from short sellers closing their positions can further drive up the stock price. 

On the other hand, a Long Squeeze happens when there are sudden and steep declines in a stock's price, prompting investors who are long on the stock to sell part of their holdings, often triggered by stop-loss orders. 

This selling pressure can cascade as more long investors attempt to protect themselves against potential losses. Both squeezes involve rapid changes in market dynamics and can amplify price movements, albeit in different directions. 

While Short Squeezes involve short sellers rushing to cover their positions, Long Squeezes involve long investors selling off to mitigate potential losses, creating distinct patterns of market behavior.

How to Identify a Long Squeeze

A few key indicators can assist in the identification of a Long Squeeze. Investors and traders wishing to ascertain whether a Long Squeeze is in the offing may wish to pay attention to market sentiment toward a given equity as expressed by price patterns and trading volumes as well as new coverage. 

A significant drop in the price of security occurs at the beginning of a Long Squeeze. Subsequently, investors that are holding Long Positions with the expectation of the security’s value rising in the future rush to sell off their investments at prices lower than they purchased them for. 

In addition to these losses, margin calls can be triggered for other traders, further increasing the sell-off’s momentum. By recognizing these key features, market watchers may be better able to identify the phenomenon of a Long Squeeze.

How Do Long Squeezes Work?

During the coronavirus pandemic, a groundbreaking Long-Squeeze situation was observed in global Oil (CL) markets. On April 20th, 2020, prices of black gold dropped to their lowest level in history as Oil Futures traders sold off their Long Positions.

This course of events was triggered by Oil demand dropping precipitously as a result of quarantines. Supply was thus much greater than global demand, and the price of this key fossil fuel dropped below $0 as companies in the industry became willing to pay others to take Oil off of their hands.

This example shows how an unexpected market shock can turn trader sentiment quickly negative, and lead to an unprecedented fall in value.


To sum it all up, a Long Squeeze happens when a sudden decline in a stock's price prompts further selling, driven by panic among long-term investors, particularly in assets experiencing significant price increases or low liquidity conditions. 

This phenomenon underscores the complex interplay of technical, supply-demand dynamics, and investor sentiment in financial markets. Value investors often exploit Long Squeeze opportunities by buying undervalued stocks, while the susceptibility to such squeezes is heightened in stocks with limited float. 

Despite the potential for recovery, fundamental factors may justify the decline. Real-life events, like the oil market crash during the pandemic, underscore how unexpected shocks can trigger dramatic value drops, highlighting the importance of vigilance and understanding market dynamics to navigate the risks associated with Long Squeezes effectively.


How does a Long Squeeze happen?

A Long Squeeze occurs when the price of a certain security drops precipitously, inducing holders of Long Positions to sell.

What are the signs of a potential Long Squeeze?

Signs of a Long Squeeze can include a security’s price dropping quickly and traders that hold Long Positions rushing to offload.

Can a Long Squeeze lead to market volatility?

When a certain stock is illiquid, even a relatively small number of shareholders can cause great fluctuations in its price within a short period of time, causing volatility.

Are there historical examples of notable Long Squeezes?

Two important occurrences of a Long Squeeze are those observed on the Oil market in 2020, and in 2008 when negative news reports led to a sell-off of Bear Stearns stock.

How long does a Long Squeeze last?

There is no set range of time that a Long Squeeze can last; the length of such a period depends on underlying market conditions and tends to end when traders view the security’s price as having declined by too much and once again begin to buy it.

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