Goldman says the stock market is undergoing its biggest short squeeze in 25 years – and that has hedge fu.. – Business Insider

• The US stock market has seen its biggest short squeeze in 25 years over a trailing three-month period, according to Goldman Sachs.
• The culmination of this came this past week, when hedge funds withdrew from the market at the fastest rate since 2009, the firm said.
• Day traders have driven up shares GameStop and other heavily shorted stocks in recent weeks, costing short-sellers billions.
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The US stock market has experienced its biggest short squeeze in 25 years over the past three months, according to Goldman Sachs.

It all came to a head this past week amid the GameStop madness that forced hedge funds to dump stock holdings at the fastest rate since 2009, the firm found.

GameStop shares spiked 400% just last week – and 1,625% across all of January – squeezing hedge funds and others who had bet against the stock, costing them billions of dollars. A short position is a bet that a share price will fall. Estimates by data provider Ortex on Friday showed that short-sellers were sitting on losses of around $19 billion just on GameStop in 2021 so far.

The surge in GameStop and other heavily shorted stocks was driven by users of the Reddit forum Wall Street Bets, who forced up the price in an effort to make themselves money but also to hammer hedge funds such as Melvin Capital. They had to buy shares in companies such as GameStop and movie theater chain AMC to close their short positions, and sell other stocks to cover their losses.

Read more: Buy these 26 heavily shorted stocks as retail traders trigger wild rallies in Wall Street’s least-liked names, Wells Fargo says

The activity was the culmination of a three-month span that saw basket of the most-shorted US stocks rally 98%, far outpacing similarly aggressive squeezes seen in 2000 and 2009. 

“Funds in their coverage sold long positions and covered shorts in every sector,” said David Kostin, Goldman’s chief US equity strategiest.

Kostin and his colleagues said regulations, limits put in place by trading platforms, or sharp losses could bring the amateur trading frenzy to a halt.

“Otherwise, an abundance of US household cash should continue to fuel the trading boom,” they said.

Goldman said retail investing was thriving because of the large amount of savings built up during the coronavirus period, as well as government stimulus.

“During 2020 credit card debt declined by more than 10%, checking deposits grew by $4 trillion, and savings grew by $5 trillion,” the investment bank’s analysts said.

“On top of these savings, our economists expect more than $1 trillion in additional fiscal support in coming months, including another round of direct checks.”

Read more: Jefferies says these 20 heavily shorted and lightly traded stocks could see big jumps in the event of a GameStop-like squeeze