MARKETS SPECTATOR: Fortescue shorters get routed

Investors with a short interest in Fortescue have well and truly been caught out as Twiggy pulled another rabbit from his hat.

Fortescue Metals Group has been the big story of the day, with Twiggy seemingly pulling another rabbit from his hat. Speculation had been rife as to how the world’s fourth biggest iron ore producer would go about shoring up its balance sheet against the backdrop of a plunging iron ore and stock price.

It shows how important it is to maintain strong relationships with your banks as Fortescue announced it had secured a $US4.5 billion credit facility to refinance all of its existing bank facilities in order to provide it with additional liquidity and stave off looming debts.

The market’s reaction says it all. The stock surged about 16 per cent on the open, tracked sideways for a few hours before moving higher during the afternoon session to now be up 20 per cent. The short interest in Fortescue Metals Group has been well publicised over the last six or so months, with big name hedge funds making it very clear they were betting against the miner.

These shorters have well and truly been caught with their pants down now. This huge short interest has dramatically exacerbated today’s surge, and could continue to drive the stock higher in the coming days as participants frantically run for the exit.

Many participants holding short positions are being forced to seriously reconsider their trades as this morning’s announcement has significantly eased balance sheet concerns over the company. Hence, the rush for the exit door and the subsequent explosion in the share price. It’s commonly referred to as a ‘short squeeze’ and can result in very violent upside moves as the rush of traders try to all exit at the same time.

In the broader market, the S&P/ASX 200 index got off to a sluggish start this morning, tracking overnight weakness lower in the first few hours of trading before finding a bid and slowly grinding its way higher. After hitting lows of 4383 this morning the benchmark index has just moved through the 4400 point level.

As we mentioned this morning (Markets Spectator: Taking profits, September 18), we were expecting there to be plenty of participants willing to step up to the bid and buy the pullback, and that appears to be exactly what is happening. The bulk of the buying is occurring in the materials sector; it was down approximately 0.9 per cent in early trade and has rallied back to now be flat for the day. Other heavy weight sectors like energy and financials are also seeing strong support off their lows.

This sort of price action is characteristic of markets that have been rallying. Case in point is the materials sector, which is up more than 12 per cent since the lows of September 5. Any participant who’s missed the trade is looking to get on board, yet it keeps moving away from them. No one likes paying up or chasing the price so they wait for the first pullback. It comes and they jump on board, fearful that this may be the only chance they get. Hence the willingness of participants to step in and buy the pull back.

Related Articles