Blowing Up Your Client

I'm fairly new to the world of sell side research (less than 5 years as an analyst), and I had my first major blow up in 2012. Wanted to walk through the perspective from the sell-side.

Background

I have a pretty good read on one of my companies and have been able to call it long or short for awhile. Data points were again particularly negative on the quarter. I pushed multiple clients short (probably something like 5m-10m shares combined) into the close of the quarter. On my earnings preview my sales traders pushed an additional few hundred k short.

Unfortunately, sentiment turned worse through the quarter as management talked down numbers. Previews were negative and short interest picked up. I started to have a bad feeling about the potential for a squeeze, but it is pretty difficult to unwind a conviction short trade.

Earnings Day

FUCK. Company posted in-line quarter with in-line guide. Though my thesis was partially correct (margins continued to decline), the quarter was better than expectations (very very low expectations). Stock popped double digits after hours.

Immediately I hit the desk and walked trading through what happened. Sales put the clients on the phone and we walked through whether a cover was necessary. I felt like long term short thesis was intact. At post-close meeting I pushed it hard again as a short from new levels, but at this point sales is tuning out. It is hard to double down on a losing streak.

Trading Day

The stock opened up low double digits and worked its way up to mid-teens. Classic short squeeze as it ticked higher during the day.

The Aftermath
Sales appreciates conviction calls, but I don't have any powder left on this particular stock. I'll have to lay lower for the next couple of months due to the magnitude of the move up.

The Lesson
I'm actually surprised the risk management teams at my clients let them stay short into print. Days to cover was mid-teens. Lesson is to be wary of overly negative (or positive) sentiment, even if you were early on the call.