Goldman Sachs (NYSE:GS) is reporting hedge funds betting against stocks globally abandoned those short positions last week at the fastest pace since 2015, surpassing the speed of exits during the ‘meme stock’ frenzy in 2021.
The latest short squeeze, implying that stock prices rose so much that bearish bets become too expensive to hold, saw hedge funds caught out by a sharp rally in equities on Feb. 2 after the U.S. Federal Reserve slowed the pace of interest rate hikes and markets anticipated that rates would peak soon, per Reuters.
According to the Goldman note, the speed at which hedge funds exited bearish positions surpassed that seen in January 2021 when retail traders managed to squeeze short sellers out of stocks such as videogame retailer Gamestop (NYSE:GME) and movie theatre operator AMC Entertainment Holdings (NYSE:AMC).
During the ‘meme stock’ frenzy in 2021, GameStop shares rose to nearly $500 per share, or +1,500% that year.
AMC shares rose from $2 early that year to an all-time high of $72 per share, more than +3,000%.
Today, both AMC and GameStop remain heavily shorted with AMC Entertainment having a higher-than-ever cost to borrow fee.
Experts say hedge funds remain bearish
Despite the massive short covering, hedge fund managers do not seem to be more upbeat about markets.
“Positioning isn’t ‘high’ and it doesn’t seem like many investors are bullish, per se,” JPMorgan’s Positioning Intelligence said in a note reviewed by Reuters, adding it has also seen hedge funds adding some shorts in highly shorted stocks.
It seems institutional investors are not entirely switching sides yet but are continuing to add to their short positions on already heavily shorted stocks.
Still, short interest in both AMC and GameStop has both risen and fluctuated, signaling few shorts closing.
AMC Entertainment stock is up more than +60% this year-to-date, GME stock more than +34%.
The movie theatre chain has a high short interest of 22.84% with an extremely high cost to borrow of 239.91%.
Hedge funds will need to determine whether it’s worth paying millions of dollars per month in fees just to short AMC stock.
A short squeeze may be triggered at any moment as this weight gets too heavy.
Industrials and Information Technology Companies
The largest short positions held by hedge funds were in industrials and information technology companies, the Goldman note said.
It added that hedge funds also exited many long positions in Asian developing markets and Chinese equities last week.
Resurgent risk appetite among some investors has also fueled rallies in the shares of so-called meme stocks since the start of this year, though many analysts are skeptical the recent moves will last, said Reuters.
But I disagree.
AMC Entertainment may have bottomed out as we see the stock price bounce and retest major levels of support.
The company’s high short interest and cost to borrow has grown substantially over the past two years.
Major price action may trigger short sellers to close their positions, initiating a chain reaction that will lead to a short squeeze.
The short thesis for AMC Entertainment is getting weaker as new developments surface in the entertainment industry.
Goldman Sachs is right, massive short squeezes are coming.
And the retail investor is about to put Wall Street upside down again, just like they did during the ‘meme stock’ frenzy of 2021.
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