The trader works on the floor of the New York Stock Exchange on April 22, 2025.
Brendan McDermid | Reuters
The key force at the heart of the stock market’s massive two-day rally is the desperation of short sellers to cover their losses.
According to key brokerage data from Goldman Sachs, the hedge fund short seller recently added bearish bets on both single shares and securities that were linked to macro development after being triggered in early April.
The increase in short positions in the market created an environment that is prone to dramatic rises due to this artificial shopping. Short sellers borrow their assets and sell them immediately. When security prices drop, they buy back cheaper to make a profit from the differences.
Security can backfire if suddenly gathers and short sellers are forced to quickly buy back the stock they borrowed to limit their losses.
Apart from what’s walking behind China and Trump’s Federal Reserve comments, if the market appears to be gathering on real, concrete news on Tuesday, praise the phenomenon.
“Squeeze risk is real today,” John Flood, managing director of Goldman Sachs, said in an early note to his client on Wednesday.
The flood repeated the sentiment of many traders who said the market seemed to be in coil state for relief rallying, as so many hedge funds were captured on the wrong side of this bet.
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S&P 500
A short cover was on display on Tuesday and Wednesday as stocks surged with signs that stocks would ease trade tensions despite not yet reaching concrete transactions. Treasury Secretary Scott Bescent said Wednesday there was “a great opportunity” on trade issues between the US and China.
The 30-stock Dow Jones Industrial Arage surged another 1,100 points high on Wednesday after earning 1,000 points of gains to end a four-day winning streak. The S&P 500 has risen 3.5% so far after consecutive winning sessions.
Trump’s quick reversal against Federal Reserve Chairman Jerome Powell also fueled positive sentiment. “There’s no intention to fire Powell after a central bank chief said a few days ago, “The end will not be fast enough.”
However, the rally quickly faded, with the Dow rising just 500 points at noon Wednesday. The open and obvious declined short aperture boost could be a reason for pullbacks from highs.
The Goldmans flood also said hedge funds have not been purchasing for a long time, from short range.
“I’m closely monitoring it to see if HF covers it with macros and singles begin to evolve into longer purchases,” Flood said. “We also want to see investors intervene for longer periods of time and buy names they consider to be fair value. We haven’t seen this type of behavior yet.”
