Short sellers are running for the exits as markets rally. Short covering has hit its highest level in over 7 years, according to a Financial Times report:
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Equity markets have risen sharply so far this year, led by many of the speculative stocks that were clobbered hardest during 2022’s global sell-off. Many of the funds that profited from the rout have found themselves poorly positioned for the rebound, which has recently accelerated as investors sensed that interest rates were close to peaking in many major economies.
The resulting flurry of short covering — when investors buy back stocks they had been betting against to limit their losses — was the largest since November 2015, according to a Goldman Sachs note to clients seen by the Financial Times.
Short sellers tend to pile into the same, heavily shorted stocks. When they rush to close their positions, this can cause a short squeeze.
A short squeeze happens when many short sellers all try to buy at once to close their positions. This can cause a stock’s price to skyrocket.
Short squeezes in stocks like AMC Entertainment Holdings and GameStop in 2021 took down hedge funds including Melvin Capital. Today, those same stocks are some of the year’s best performers.
Despite big increases in heavily shorted stocks, short sellers still have massive exposure. AMC’s short interest has dipped only slightly, remaining at a lofty 29%.
This indicates such stocks could have a lot of room to run. Short sellers will have to buy many more shares to close out their positions.
Shorts are also facing some of the heaviest retail buying in history. Retail buying hit an all-time high of 23% of all stock buys, according to a recent Forbes report.
Retail investors are the biggest buyers of many heavily shorted stocks, including AMC and GameStop.
Over a month ago, I predicted a market rally in 2023. I guess the hedge funds missed that post. 🙂
If the Fed remains dovish, I expect many more losses for short sellers. 2023’s short squeezes could make 2021 look almost quaint.
What do you think the future holds for short sellers? Leave a comment at the bottom and let me know!
More on markets:
As Fed Rates Peak, Are Markets Ready to Take Off?
Major Hedge Fund Down 54% — Survival in Doubt
SEC Refuses to Address Massive Fraud in Markets
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