The market is going through a short squeeze of historic proportions, even bigger than the meme craze

Published Mon, Jul 24 20233:14 PM EDT

Remember the GameStop mania of 2021, fueled as it was by forcing short sellers to cover their bets? Now, another epic episode of short squeezes could be on the horizon. The number of stocks among the top 3,000 U.S. companies with 20% of their outstanding shares sold short has reached the upper end of the historical range, exceeding that seen during the meme stock craze in early 2021, according to Trivariate Research. To be sure, some of the squeeze could have already taken place, with 22% of those heavily-shorted stocks up at least 50% over the past three months, the Wall Street research firm said. "This recent price action is noteworthy, as only five times in the last 17 years have more stocks been up 50% that are this heavily shorted," Adam Parker, founder of Trivariate, said in a note. A short seller borrows shares of a stock and sells the borrowed shares back in to the open market, hoping that if the stock price falls, the trader would buy it back for less money, pocketing the difference. However, when the stock jumps instead, it forces short sellers to buy back shares in order to limit their losses. The short covering further fuels the stock's rally. The stock market is in the middle of a strong rally as inflation pressures ease and the Fed nears the end of its rate-hiking campaign. The Dow Jones Industrial Average is currently up for 11 straight days, its longest rally since 2017. The S & P 500 has rallied more than 18% this year, after scoring its best first half since 2019. Amid the broader rally, some of the most hated stocks have been pushed even higher as short sellers were forced to buy back shares to cover their short positions. Still, there have been other periods with a similar level of heavily shorted stocks that didn't see many squeezed sharply higher, disrupting the broader market in the process, Parker said. GameStop was once the most shorted stock in the market, with short interest as a percentage of shares available for trading exceeding 100%. Today, the most shorted stock is Nasdaq-listed Allogene Therapeutics , with about 50% of its shares sold short, according to data from the exchange as of June 30. Carvana , Novavax, Lucid Group and Beyond Meat were also heavily targeted by short sellers.