Short sellers hit hard! MEME stocks surge wildly, causing short sellers to lose over $1 billion

Source: FX168 Financial News

This week, meme trading unexpectedly revived, causing traders who were heavily shorting some stocks to suffer losses on their positions.

Goldman Sachs created a portfolio that is long on stocks favored by hedge funds, while also shorting 50 stocks, which have dropped by about 13% over the past two trading days, potentially marking the most severe two-day decline since the peak of the 2021 retail trading frenzy financial crisis.

Stocks like GameStop Corp. and AMC Entertainment Holdings Inc., once popular among retail investors, surged significantly, highlighting this trend. These heavily shorted stocks, after rising over 70% in the previous trading day, extended their gains on Tuesday, leading the market.

According to data from S3 Partners LLC, bearish bets on this currency pair have resulted in losses exceeding $1 billion this month: short positions on GameStop lost $1.24 million in May, while AMC short positions lost around $126 million.

Short sellers have incurred most of their losses due to the surge in meme stocks over the past two trading days.

Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3 Partners LLC, wrote in a report on Tuesday, "Today's losses will push many short sellers to the brink and force them to cover their positions." He added that these losses, especially for companies shorting AMC, "are turning their year-to-date and month-to-date profits into ashes."

Short squeezes — rapid price increases forcing short sellers to buy back shares to cover their positions, usually resulting in losses — could lead to further price hikes and additional pressure on other short sellers. The surge in meme stocks could also lead to gamma squeezes, where rising prices prompt traders to buy call options, forcing market makers to buy the underlying stocks and drive up prices.

In Tuesday's trading, heavily shorted stocks continued to rise, with this enthusiasm spreading beyond the most popular retail stocks. SunPower Corp. surged 92%, hitting an intraday record, while BlackBerry Ltd. and Virgin Galactic Holdings Inc. rose by 24% and 36% respectively. However, the media company of the former president, Trump Media & Technology Group Corp., which has recently become a darling of the retail sector, saw a more modest increase of 6.9% GameStop's stock price more than doubled at the opening, reaching its highest level since 2021, while AMC surged by 129%.

The volatile trading is encouraging more short sellers to get involved in meme stocks. However, the stock prices of AMC and GameStop are still far below their peaks in 2021, as are other companies of interest to short sellers.

Dusaniwsky stated, "Meme trading is back, with stocks like GME, AMC, and DJT soaring, short sellers are teetering on the edge of the short squeeze cliff."