Shares in GameStop have been unstoppable since the addition of a new board member, activist investor and Chewy co-founder Ryan Cohen. Cohen has a strong reputation, but the real reason for this sharp climb is a textbook short squeeze, say experts. As the stock rose on retail investor-fueled euphoria, short sellers faced with mounting losses and high borrowing fees were forced to close their positions and buy.

Will these gains last? No, said Wedbush analyst Michael Pachter, who has a $16 price target. The stock closed 10% higher at $43.03 yesterday after short seller Citron Research suspended a livestream event that was meant to skewer the company. 

We looked over at Google Trends, and it turns out U.S. searches for "short squeeze" are at by far the highest point since 2004 when the data started being recorded. 

Bulls, Not Bears, Pushing Short Interest Higher

It's not been an easy time to be betting against the U.S. stock market. Short interest may have grown by $108 billion last year to $1.05 trillion, but that's only half the story. Short interest increased due to the rally in share prices, masking the fact that short sellers were actively covering their positions into the 2020 rally, according to S3 Partners. 

"The $282 billion of mark-to-market increase in the value of shares shorted was partially offset by $175 billion in buy-to-covers. Short-side mark-to-market losses caused short squeezes in many shorted domestic equities/ADRs," it said in a recent report. 

The median S&P 500 stock short interest as percentage of market capitalization has fallen to 1.5%, according to Goldman Sachs, the lowest level since 2004. The bank's basket of stocks with the highest short interest was up over 218% from March lows as of Jan. 11. 

A Rough 2020 and No Sign of Reprieve

Short sellers were down $245 billion last year after 57% of all shorted stocks ended being losing propositions. The largest losses were in the consumer discretionary and information technology sectors and there were minimal profits in the energy, real estate, financial, and utilities sectors. Just five short positions had over $1 billion in profits – Exxon Mobil, AT&T, Raytheon, Luckin Coffee, and Wells Fargo. In comparison, there were 52 stocks with over $1 billion of short losses, led by Tesla, of course. Investors betting against the electric car maker were down $40 billion. 

This story of rising short interest combined with short squeezes and short covering has continued in 2021, said S3 Partners. Short interest has risen by $51 billion so far and short sellers have suffered $78 billion in mark-to-market losses. Sophos Capital, one of the largest short selling hedge funds in the world, is rumored to be scaling down some positions since late last year.