A long squeeze is a situation in which investors who hold long positions feel the need to sell into a falling market to cut their losses. This pressure to sell usually leads to a further decline in market prices.
This situation is less common than the opposite “short squeeze”, because in a short squeeze, the traders who have taken the short contracts have a legal obligation to settle with the promised shares. A trader who is ‘long’ in a long squeeze may well have no such obligation, but may sell out of fear. Other investors may see the rapid decline in price as irrational and a buying opportunity (more often than a rapid rise in price seen as a shorting opportunity). However, given recent significant market turmoil, long squeeze has become of more practical interest rather than merely a theoretical possibility. In 2008, Bear Stearns was wiped out after market rumors that the company had cash concerns. Investors started selling the scrip, resulting in a long squeeze, which triggered many other stop order losses and accelerated the decline of the company’s stock.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.