Stocks in GameStop have been unstoppable since the addition of new board member, activist investor and Chewy co-founder Ryan Cohen. Cohen has a solid reputation, but the real reason for this strong rise is a textbook short press, say the experts. As the stock rose in euphoria fueled by retail investors, short sellers facing mounting losses and high borrowing costs were forced to close their positions and buy.
Will these gains last? No, said Wedbush analyst Michael Pachter, who has a price target of $16. The stock closed 10% higher at $43.03 yesterday after short seller Citron Research suspended a live event intended to confuse the company.
We looked at Google Trends, and it turns out that US searches for “short squeeze” are by far the highest point since 2004, when the data first started being recorded.
Bulls, not bears, pushing short interest higher
It hasn’t been easy betting against the US stock market. Short interest may have grown from $108 billion last year to $1.05 trillion, but that’s only half the story. According to S3 Partners, short interest increased due to rising stock prices, masking the fact that short sellers were actively hedging their positions into the 2020 bull run.
“The $282 billion of mark-to-market the increase in the value of stocks sold short was partially offset by $175 billion of hedge purchases. Short-term market losses caused short squeezes on many short domestic stocks/ADRs,” he said in a recent report.
According to Goldman Sachs, the median short interest rate on S&P 500 stocks as a percentage of market capitalization fell to 1.5%, the lowest level since 2004. The bank’s basket of stocks with the lowest short interest highs rose more than 218% from March lows on January 11.
A difficult year 2020 and no sign of reprieve
Short sellers fell $245 billion last year after 57% of all stocks sold short ended up being losing bids. The largest losses were recorded in the consumer discretionary and information technology sectors and profits were minimal in the energy, real estate, financials and utilities sectors. Just five short positions generated more than $1 billion in profits – Exxon Mobil, AT&T, Raytheon, Luckin Coffee and Wells Fargo. By comparison, there were 52 stocks with over $1 billion in short losses, led by Tesla, of course. Investors betting against the electric car maker lost $40 billion.
This story of rising short interest combined with short squeezes and short hedges continued into 2021, S3 Partners said. Short interest has increased by $51 billion so far and short sellers have suffered losses of $78 billion at market price. Sophos Capital, one of the world’s largest short-selling hedge funds, has reportedly trimmed some positions since late last year.