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Biggest short-term stock market squeeze in 25 years caused hedge funds to dump stocks: GS

  • The U.S. stock market experienced its biggest short squeeze in 25 years over a three-month period, Goldman Sachs said.
  • Last week, hedge funds pulled out of the market at the fastest pace since 2009, he said.
  • Day traders drove shares of GameStop and other heavily shorted stocks higher, costing short sellers billions.

The U.S. stock market experienced its biggest short squeeze in 25 years in the past three months, according to Goldman Sachs.

It all came to a head last week amid the GameStop madness that forced hedge funds to dump their stock holdings at the fastest pace since 2009, the company found.

GameStop Shares soared 400% last week – and 1,625% for the whole of January – crushing hedge funds and others that had bet against the stock and costing them billions of dollars.

A short position is a bet that the price of a stock will fall. Data provider Ortex estimated on Friday 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 fueled by Wall Street Bets Reddit forum users. They forced prices up to make money and speculative hammers such as Melvin Capital; the funds had to buy shares in companies such as GameStop and the AMC movie theater chain to close their short positions and sell other shares to cover their losses.

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

The activity was the culmination of three months in which a basket of top-selling U.S. stocks rose 98%, far exceeding similarly aggressive pressures in 2000 and 2009.

“Funds in their hedges sold long positions and hedged short positions across all sectors,” said David Kostin, Goldman’s chief U.S. equity strategist.

Kostin and his colleagues said that the regulations, limits set by trading platformsor heavy losses could end the amateur trading frenzy.

“Otherwise, ample US household cash should continue to fuel the trade boom,” they said.

Goldman said retail investment was thriving on savings accrued during the coronavirus pandemic as well as government stimulus measures.

“In 2020, credit card debt fell by more than 10%, check deposits grew by $4 trillion and savings by $5 trillion,” analysts at the bank said. investment.

“In addition to these savings, our economists expect more than $1 trillion in additional fiscal support in the coming months, including another round of direct controls.”

Read more: Jefferies says these 20 heavily shorted, lightly traded stocks could see big jumps in a GameStop-style crunch

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