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Solar's Short Squeeze Days Are Numbered

NEW YORK ( TheStreet) -- Tuesday was a blood bath for the First Solar (FSLR - Get Report), LDK Solar (LDK), Trina Solar (TSL), Yingli Green Energy (YGE), and Sun Power (SPWR) short sellers. The short seller party was well attended based on the latest short interest numbers.

First Solar and SunPower have eye-popping 36% and 21% of their floats shorted, respectively. When First Solar announced what appeared on the surface to be vastly improving financials, there wasn't time to think. Once the stocks started moving higher, it was shoot first and ask questions later.

For active and on the edge short sellers, it doesn't matter if your short thesis is still intact if your account isn't at the end of the day. I witness this sort of knee-jerk reaction forcing a spike in share price often. You can as well. Just set your stock scanning software to look for stock spikes, and then looks to see how they performed for the next few days. I am including the most similar scenario to First Solar and the results.

I asked Stockfinder, one of the scanning software tools I use daily, to search for stocks with the following attributes:

  • Increased at least 35 percent from the opening price
  • Starting price of at least $12
  • Ranked in the top 2500 stocks by volume

As should be evident by the simplicity of the criteria, I didn't curve fit for any type of result. After as many years of market observation as I have, the results were anything but surprising. Buying a stock at the closing price -- often much lower than the day's high -- during a massive price spike results in a net annualized loss of over 1000% compared to simply waiting one more day. In other words, after a price spike, stocks tend to retrace quickly.

Stockfinder reports the odds of the next day moving higher is only 43%, compared to a 57% chance the next day will result in a lower closing price. While the odds of higher prices doesn't initially appear terribly atrocious, it's the amount of depreciation experienced when the price does fall that indubitably places price chasers in a world of misery.

If you buy at the close of the spike and hold for a week, the results become even more painful. The winning percentage drops to only 21 percent, and the expected rate of return drops to a negative 2000% (-2125% to be exact).

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