- Short sellers have shrunk their positions in heavily shorted stocks by 80% since January.
- Short-seller losses in that period were largely limited to meme stocks over the same period, Barclays said.
- Traders wagering on meme stocks to fail have been “burned very badly” amid the frenzy, said strategist Matt Maley.
- See more stories on Insider’s business page.
The army of retail traders credited with squeezing GameStop and AMC short sellers earlier this year have largely pushed bears away from meme-stock names.
The tally of stocks with high short interest – a measure of wagers to the downside – has “come down dramatically” from mid-January when the GameStop craze began, a report from Barclays shows.
The number of companies for which short interest makes up 30% or more of shares outstanding has plummeted from 43 to just 18. In dollar terms, that means short sellers have shrunk their positions by 80%, from about $25 billion to just $5 billion, the data show.
The meme-stock craze has “definitely had an impact,” Matt Maley, chief market strategist for Miller Tabak, told Markets Insider, as short sellers have been “burned very badly.”
“It really disrupts a lot of strategies,” he said. “Some of these long-short strategies that have worked very well for a long time are getting thrown through a major loop because there’s no way any model says GameStop should trade at $300 something or AMC should trade at $70.
He added: “It ruins their hedges, and they’ve got to rethink some things.”
Amid the GameStop craze alone, analysts estimated short-seller losses totaled $19 billion. Melvin Capital, which took a 53% loss because of the craze, later exited all of its public short positions, though it may still hold some privately.
Renewed interest in meme stocks in recent weeks has driven more short sellers losses. On June 2 alone, a meme stock rally led by AMC caused nearly $5 billion in losses for short sellers in the top 10 shorted stocks, ORTEX data showed.
Even so, “the recent short squeeze in meme stocks over the last two weeks has also not led to material underperformance of the short interest factor baskets during this period,” Barclays said.
Short-seller losses have been largely localized to meme stocks that have generally had high short-interest rates. The data shows total short bets has remained steady since January, but the number of heavily shorted stocks has declined to less than 1% from 2.8% of the total.
“Given the low risk of a broad contagion, we view the fallout of the recent short squeeze to be limited,” Barclays said.
Bearish bets on companies with high short interest rates have been underperforming since March 2020, and the GameStop episode accelerated that, said Barclays analysts led by Maneesh Deshpande.
“The underperformance in the January 2021 episode was more acute in smaller cap names, which is where most of the high short interest was concentrated,” they said.
Small to midsize companies are the easiest targets for retailers to drive a short squeeze, as it doesn’t take as much money to move the stock, according to Maley.
“Those are the ones you can really squeeze because they’re just less liquid,” he said. But a company like General electric with a big share float, “you can’t squeeze; there’s just too much money in the stock.”