Why BlackBerry's Gain Was A Mirage

| About: BlackBerry Ltd. (BBRY)

BlackBerry reported earnings results on Thursday and its shares opened 4.4% higher, but by the end of the day, BlackBerry (NASDAQ:BBRY) had closed lower by 0.8%. That's quite a reversal and not common for a company that moves on the basis of its earnings. That's why I'm confident that what drove BBRY Thursday morning was more of a trading issue tied to the massive short interest in the stock than it was an operational driver. As a result, moving forward I'm still confident in my short view for the stock.

Chart forResearch In Motion Limited

Chart at Yahoo Finance

You can see the differences in the day's performance of BlackBerry against the iShares S&P Global Telecommunications (NYSEARCA:IXP) and versus rivals Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF) and Nokia (NYSE:NOK) in the chart here. The S&P 500 Index marked a record high on the day, but these major mobile phone makers all did poorly. BlackBerry of course had its company specific news driver, but if it was strong enough good news it should have carried through the day, not just until 3:00 PM ET. Instead the stock completely changed course.

I'm going to get into the details of BlackBerry's report and something that bothered me about the company's operational performance in my next article. That information helps to form the basis of my longer term sell recommendation on the stock. This article is dedicated to helping investors understand the reasoning behind the stock's movement on the day of its quarterly report. Obviously, the fundamental results matter, and trading took its lead from the data, but the dynamic movement of the shares Thursday must be explained by its significant short interest. Basically, the report was not bad enough to sink the stock, and so short interests very likely closed out positions on a failed trade thesis.

Record short interest in BlackBerry shares rose to more than 155 million shares heading into its EPS report. More than 30% of its float had been shorted versus 11% at the same time a year ago. While the earnings results were not good enough for yours truly or for many analyzing the stock publicly Thursday, the result was obviously neither bad enough to sink the shares from the get-go Thursday. Because short investors typically have short-term time horizons, many likely closed out their positions on the day to cut their risk and perhaps losses. That's because the next event factor has just as much potential to be a planned or unforeseen positive as it does to be a negative news event. For instance, BlackBerry still has the keyboard inclusive version of its newest phone to introduce to the market, so shorts might not want to be in play around that.

In conclusion, I believe this short interest factor is what drove the stock higher at the open and kept it above water through the day, before it sank into the close. The fact that BBRY closed so convincingly lower speaks to the report itself and portends to the company's challenges and future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.