Why Shares of Car-Rental Outfit Avis Are Driving Higher Today

Following through on bullishness that first materialized late last month, shares of Avis Budget Group (NASDAQ: CAR) are up again today. Indeed, thanks to today's 15.7% gain (as of 3:40 p.m. ET), the stock's up 150% from its mid-March low, reaching a new 52-week high in the process.

You just can't count on this rally continuing much longer than it already has enough to dive into it now.

Artificially induced

Some investors will argue against that warning. Just consider the source -- they may have something to gain from any continued upside.

See, Avis has been labeled a short-squeeze candidate. What's that? A short squeeze is simply a strong wave of buying among traders that have sold a stock they don't own in anticipation of it losing value, with plans to buy these shares at a later time at a lower price to close out the trade and lock in a gain. If these positions begin moving higher rather than lower, however, this crowd can also unwind them by buying the stock at a higher price that might lock in a loss, but at least takes the risky trade off the table. The "squeeze" is the point where these losses become so big that traders become desperate to buy back their shorted shares at any price just to unwind a holding that -- in theory anyway -- has no limit to its potential downside.

And the short squeeze argument for CAR stock holds water. As of the latest confirmed report, 23% of Avis's outstanding shares and 48% of its total float have been sold short, with both numbers likely to have grown in the meantime as more and more traders opted to bet this stock would indeed begin losing ground. Every day this stock continues to log gains, these short-sellers' unrealized losses widen.

Not nearly enough certainty to take either side

This is largely a psychological game, of course. Short sellers are working to convince the (often online) crowd that a stock is poised to lose value, which can spur the very selling and short-selling that ends up dragging a stock lower. The "short squeeze" proponents, conversely, argue that a bunch of short sellers are on the verge of closing out their trades, which will push the stock higher by virtue of unleashing a wave of buying that unwinds their positions.

Image source: Getty Images.

The problem -- and risk -- for everyone in either camp is that nobody can predict with any real accuracy how such standoffs will shake out. The matter's got next to nothing to do with the underlying company's results or the stock's value, after all.

In other words, the "smart-money" move here is choosing not to play the game in the first place.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.