Defying bearish expectations once again, electric vehicle (EV) manufacturer Mullen Automotive (NASDAQ:MULN) managed to generate a strong start to its final stock trading session of 2022. As was the case yesterday, the focus among market participants centered on the company’s short borrow fee rates. With MULN stock becoming more expensive to short, many retail traders see this dynamic as a potential catalyst for a short squeeze.
According to the latest data from Fintel, the short borrow fee jumped to 313.76%. At the start of the prior Dec. 29 session, this stat pinged at 156.76%, eventually skyrocketing to a stunning 281.79%. To quickly recap, borrow fees refer to a type of secured loan which bearish traders pay to initiate their shorting activities.
What attracted contrarian investors to MULN stock is the typical range of borrow fees, both for non-shorted securities as well as ones that bearish traders target. Per Financetrain, “[t]he typical fee for a stock loan is 0.30% per annum.” However, this expense can jump to 20% to 30% per annum for heavily shorted stocks. Obviously, MULN features a cost to borrow more than 10 times standard expectations.
To be sure, MULN stock responded very well to contrarians pushing for a short squeeze. At the time of writing, MULN gained nearly 6% after starting the morning’s trading session up 5%. In the trailing five sessions, the EV maker returned stakeholders more than 27% of equity value. Still, the enterprise remains deeply embattled for the year.
MULN Stock Is More Than Just a Single Stat
Compounding the ambiguous nature of MULN stock — near-term excitement versus longer-term risks — is that professional traders typically use short borrow fees as a potentially viable contrarian indicator. Essentially, it’s a cat-and-mouse game. As pressures build for short traders, the idea centers on one of them blinking. If so, the subsequent covering action could cascade to possibly exceptional upside for the target security.
As TheStreet mentioned, S3 Partners analyst Ihor Dusaniwsky utilizes costs to borrow to extract valuable information. “An increase in stock borrow rates may force (squeeze) some short sellers into closing their positions — getting out to realize their remaining mark-to-market profits and exiting before other buy-to-covers drive the stock price up,” Dusaniwsky stated.
Certainly, rising fees contributed to short-term spikes in other bearishly targeted stocks. However, it’s important to realize that no one stat guarantees a particular outcome. Otherwise, one would only need to wait for certain metrics to flash. In other words, everyone would do it.
At the most basic level, rising borrowing fees for MULN stock indicate increased demand to short the underlying company. Stated differently, a possible bullish outcome represents downwind speculation about human emotional reactions to the primary data point. Whether short traders take the bait as a secondary action is not always predictable or reliable.
Finally, it’s worth noting that when MULN stock bounced dramatically higher around mid-December following Mullen’s disclosure of a $200 million order, shares eventually cratered prior to the recent short-squeeze speculation. Thus, the bears themselves carry confidence that MULN will move in the direction they ultimately seek.
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 InvestorPlace.com Publishing Guidelines.
