The Short Squeeze – Short Seller’s Recent Struggles
Throughout the first month of the year, the S&P 500, the index that several believe best correlates to the broad market, rose a total of 6%. This comes after a 19.4% decrease in 2022, where several bears and short sellers profited from the losses of several companies and ETFs. Now, as January has rekindled a fire in the stock market, short sellers are down big, with a total upwards of $81 billion of losses. For context, throughout 2022, the total gains of those who shorted the market were equal to about $300 billion. The severe losses incurred this month come after positive economic data showing a consistent cooling in inflation, coupled with the Fed’s newer promise to begin cutting interest rates later this year. The news and other bullish movements in the market create what is called a “short squeeze”, where short sellers are forced to sell off their positions to cut losses, and in turn, create more market momentum. As a quick note, the risk involved with short selling is very different than investing long, as since you are betting against a company or an index, your potential to lose is endless.
Nevertheless, despite the broad short sellers losing big in January, there were still some gains to be seen in several other bearish areas. An index tracking the 50 most shorted stocks in the Russell 3000, another index that tracks the 3000 largest U.S. traded stocks, saw gains of 15% throughout January. Regardless, current market conditions are still quite uncertain; with more positive data on GDP and the labor market, investors will be keeping their eyes on the overall sentiment from earnings this week to judge next month’s pace for the market.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
