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- The US stock market has seen the largest short squeeze in 25 years in a three-month period, according to Goldman Sachs.
- The peak of this came last week, when hedge funds withdrew from the market at the fastest pace since 2009, the company said.
- Day traders have been pushing up GameStop and other heavily short-outs in recent weeks, costing short-sellers billions.
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According to Goldman Sachs, the US stock market has seen its worst tightness in 25 years in the past three months.
It all came to a head this past week during the GameStop frenzy that forced hedge funds to dump stocks at the fastest pace since 2009, the company found.
GameStop shares were up 400% last week – and 1,625% throughout January – suppressing hedge funds and others who had gambled against the stock, costing them billions of dollars. A short position is a bet that a stock price will fall. Data provider Ortex estimates on Friday showed that short sellers so far on GameStop had lost about $ 19 billion in 2021.
The rise in GameStop and other heavily short-short stocks was driven by users of the Reddit forum Wall Street Bets, pushing the price in an effort to make money, as well as to beat hedge funds like 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 shares to cover their losses.
Read more: Buy These 26 Strongly Shorted Stocks As Retailers Want to Rally Rally in Wall Street’s Least Popular Names, Wells Fargo Says
Activity culminated in a three-month period when the basket of the most short-circuited US stocks rose 98%, well above the similarly aggressive bottlenecks of 2000 and 2009.
“Funds in their cover sold long positions and covered shorts in every sector,” said David Kostin, Goldman’s chief US equity strategy.
Kostin and his colleagues said regulations, limits put in place by trading platforms, or sharp losses could bring amateur trading to a halt.
Otherwise, an abundance of cash from US households would continue to fuel the trade boom, they said.
Goldman said retail investing has flourished due to the large amount of savings accrued during the coronavirus period, as well as the government stimulus measures.
“In 2020, credit card debt fell more than 10%, deposit control grew by $ 4 trillion and savings grew by $ 5 trillion,” said the investment bank’s analysts.
“On top of these savings, our economists expect more than $ 1 trillion in additional fiscal aid in the coming months, including another round of direct checks.”
Read more: Jefferies says these 20 strongly shorted and lightly traded stocks could see big jumps in the event of a GameStop-esque squeeze