Stock Market

ContextLogic Stock Could Bounce Higher Now, but Don’t Count on It

With the disappointing performances of certain popular meme stocks lately, it might be time to reevaluate exposure to other internet community-driven trades. Notably, ContextLogic (NASDAQ:WISH) stock.

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ContextLogic runs one of the world’s largest e-commerce marketplaces under the brand and has experienced significant speculative interest.

Because WISH stock had the bears smelling blood, contrarians opted for the short squeeze.

Theoretically, attempting to blow up a heavily shorted equity unit — known as a short squeeze — is a viable trading tactic, all other things being equal.

It may bring incredible profitability to the bulls daring enough to initiate the trade. In addition, there’s the psychological satisfaction that you’re enriching yourself from the opposite traders, as in those “dirty evil” bears.

As you may know, bears enter a short position by borrowing securities (in this case, WISH stock) and then selling them in anticipation that they will drop in price.

If they do, they buy back the shares at the discounted rate and return them to the lender, pocketing the difference as profit.

The Contrarian Trade Didn’t Pan Out for WISH Stock

Of course, a pure short trade is one of the most dangerous in finance because there’s no ceiling to how high a security can price.

Therefore, if you were short WISH stock and instead of dropping, it soared to the moon, you’re still contractually on the hook for returning the shares borrowed to initiate the bearish position.

Deliberately driving up the price to force bears to panic is a short squeeze.

On paper, WISH stock seemed to have the right attribute for being a short-squeeze candidate; namely, a sizable short percentage of float (or 12% during my last write-up for ContextLogic).

Typically, anything in double-digit territory suggests significant bearishness for the equity unit in question. Nevertheless, I noted that wasn’t the only factor to consider, writing:

However, before you dive into the contrarian trade here, you should also note that the short ratio (or days to cover) is only 0.29. This stat refers to the fact that bearish traders only need less than one day based on average trading volume to cover their position.

From my perspective, if you’re attempting to profit from a risky trading tactic, you’d presumably want the odds in your favor. So, with only the short percent of float working with you here, speculators should think twice about WISH.

At the time of the aforementioned publication (June 30), the short ratio being 0.29 left little room for contrarian traders to box the bears in.

In other meme trades where the short-squeeze tactic was the definitive motivation, the equity units in question had both high short percentage of float and a high short ratio.

In other words, each time the contrarians bought up shares to initiate short squeezes where the days to cover was equally problematic for the bears, it added leverage to the bulls. That’s because with fewer shares available, the bears would get desperate.

With WISH stock, they may have gotten concerned but not anxiously frantic. Therefore, I wasn’t surprised to see shares drop more than 17% during the trailing month. I mean, I strongly suggested this was a possibility.

A Possible Upside Opportunity?

But now that substantial downside in WISH stock has already subsided, is there a chance that it could swing higher? That’s the basic idea that InvestorPlace contributor Chris Tyler explored (exactly on the same day that I wrote my piece, as it turns out).

In a nutshell, Tyler states that underneath the social media noise is a potential gem, so long as you’re patient with it.

Primarily, he mentioned that the company’s robust monthly active user base is akin to numbers seen in far more established names like Amazon (NASDAQ:AMZN) or Alibaba (NYSE:BABA).

Moreover, Tyler states that the problems that the platform faced — most conspicuously the allegations of the sales of counterfeit goods — represent similar challenges that dogged Amazon and Alibaba.

Yet these latter two organizations are doing just fine, suggesting that this too shall pass for WISH stock.

It very well might. Frankly, though, I believe any positive sentiment will come from traders banking from the ebb and flow of technical analysis. Without this sentiment, I don’t see WISH being a comfortable trade.

After all, the positive attributes that Tyler and others have mentioned have been known factors yet the stock continued to plummet.

I’ll say this: if you’re good at reading the psychology of social media, perhaps there might be an upside opportunity here. For those who don’t have an ironclad stomach, I’d stay away.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.