The big two-day rally in U.S. stocks that has sent well-known names such as Apple (AAPL), Nvidia (NVDA) and Tesla (TSLA) soaring is again being attributed to a short squeeze.
Data from Goldman Sachs’ (GS) prime brokerage has found that the major U.S. indices have been driven higher on April 22 and 23 by frantic short sellers who are scrambling to cover their losses. Many short sellers, including at hedge funds, began the trading week placing bearish bets on both single stocks and the markets as a whole, expecting them to decline further, says Goldman Sachs.
Bets that stocks would fall ramped up on April 21 as the Dow Jones Industrial Average lost nearly 1,000 points on the day as U.S. President Donald Trump threatened to fire Federal Reserve Chair Jerome Powell. However, short sellers had to scramble to cover their bets by purchasing stocks as markets suddenly moved higher after Trump indicated he won’t fire Powell and softened his stance on trade with China.
The result was what’s known as a “short squeeze,” which is when short sellers have to purchase a stock to limit their losses, causing the price to rise further.
Dramatic Moves
In a note to clients explaining what’s happening in the U.S. market, John Flood, a managing director at Goldman Sachs, wrote “squeeze risk is real today.” The investment bank notes that short squeezes have largely been responsible for the big upward momentum seen in U.S. markets, which continue to gyrate from gains to losses in volatile fashion.
Flood echoed the sentiment of many traders that have said the market isn’t really experiencing a relief rally so much as hedge funds are covering their short bets. In his note, Flood said that hedge funds haven’t gone from short covering to outright buying of stocks on the long side, a sign that the rally doesn’t have high conviction.
Is GS Stock a Buy?
Goldman Sachs stock has a consensus Moderate Buy rating among 14 Wall Street analysts. That rating is based on seven Buy and seven Hold recommendations assigned in the last three months. The average GS price target of $607.50 implies 13.26% upside from current levels.
