Squeezes: Definition, How They Work, Types, and Examples

What Is a Squeeze?

The term "squeeze" is used to describe many financial and business situations, typically involving some sort of market pressure. In business, it is a period when borrowing is difficult or a time when profits decline due to increasing costs or decreasing revenues.

In the financial world, the term is used to describe situations wherein short-sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.

Key Takeaways

  • The term squeeze can be used to describe several situations that involve some sort of market pressure.
  • In finance, the term is used to describe situations wherein short-sellers purchase stock to cover losses or when investors sell long positions to take capital gains off the table.
  • Profit squeezes, credit squeezes, and short squeezes are all examples of when market pressure accelerates or intensifies a financial situation.
  • Squeeze situations are often accompanied by feedback loops that can make a bad situation worse.
  • Recently, the GameStop short squeeze in January 2021 caused short sellers to lose $5.05 billion.

How Squeezes Work

The term is used liberally in finance and business and describes any situation wherein people are realizing losses, taking gains, or finding credit financing difficult. Several types of squeezes—including profit squeezes, credit squeezes, short squeezes, long squeezes, and bear squeezes—are explained below.

Squeeze situations are often accompanied by feedback loops that can make a bad situation worse.

Types of Squeezes

Profit Squeeze

A profit squeeze is realized by a business when its profit margins have decreased or are decreasing. This type of squeeze happens when a company's revenue declines or its costs rise. The underlying causes of a profit squeeze are numerous but commonly consist of increased competition, changing governmental regulations, and expanding producer and supplier power.

Credit Squeeze

A credit squeeze describes any situation where it becomes difficult to borrow money from banking institutions. This type of squeeze normally happens when an economy is in a recession or when interest rates are rising. The issuance of bad debt, such as in the case of the 2008 financial crisis, often causes a recession and a credit squeeze. Rising interest rates occur because the Federal Reserve deems the economy is strong enough, and consumer confidence is high enough, to assume a higher rate of interest. A credit squeeze can thus occur in a down market and an up market.

Short Squeeze

A short squeeze is a common scenario in the equities market where a stock's price increases and its purchase volume spikes because short-sellers are exiting their positions and cutting their losses. Consider how to trade a short squeeze. When an investor decides to short a stock, he is betting the price declines in the short term.

If the opposite occurs, the only way to close the position is to go long by purchasing shares of the stock. This causes the stock's price to further increase, resulting in further action by short-sellers. Overall, 2020 was a rough year for short-sellers.

Long Squeeze

A long squeeze occurs in a strong financial market when there are sharp price decrease and investors who are long a stock sell a portion of their position, pressuring more long holders of the stock into selling their shares to protect against a dramatic loss. This normally happens because investors place a stop-loss order to mitigate risk and ensure they are protected against any price declines.

Even when prices are increasing, they often do so with volatility, and short downward swings can trigger the sell order.

Bear Squeeze

A bear squeeze is a situation that happens when traders are forced to buy back underlying assets at a higher price than they sold for when entering the trade, due to rising prices. A bear squeeze is typically associated with a short squeeze, although in this case, prices are rallying higher. Beer squeezes can be brought about by intentional events, such as an announcement by a central bank, or a byproduct of market psychology.

Other Types of Squeezes

liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding the short-term availability of money. These concerns may cause banks to be more reluctant to lend out money within the interbank market. As a result, banks will often impose higher lending requirements in an effort to hold onto their cash reserves. This cash hoarding will cause the overnight borrowing rate to spike significantly above its benchmark rate, and as a result, the cost of borrowing will increase.

A financing squeeze is when would-be borrowers find it difficult to obtain capital because lenders fear making loans. This often leads to a liquidity crisis if there is little cash on hand and not enough operating cash flow.

Examples of Squeezes

GameStop Short Squeeze

In January 2021, a virtual post on a page of the online forum Reddit's subreddit channel r/wallstreetbets caused a short squeeze of the video game company GameStop's stock. The stock reached a pre-market value of more than $500 per share, which had multiplied over 30 times since its starting stock price of $17.25. Cumulatively, GameStop's short sellers lost $5.05 billion.

Short selling situations can be risky situations to navigate for novice investors, with money made and lost within just seconds. In the case of GameStop, the Robinhood trading app was sued in a class-action lawsuit for breach of contract after the company halted trades on GameStop and other short-sold stocks.

Great Depression Credit Squeeze

The stock market crash of 1929 caused an air of frenzy in the United States. The first bank runs occurred in the fall of 1930 in Nashville when account holders ran to withdraw all of their funds at once from the bank. Quickly, this credit squeeze spread across the U.S., causing many banks to liquidate their loans to appease their depositors and thus leading to multiple bank failures. New York's Bank of the United States had more than $200 million in deposits at the time when it collapsed in 1931, making it the largest bank failure in American history.

Long Squeezes Within Apple

Long squeezes are not as dramatic to the market as short squeezes but can be witnessed by looking at the intraday charts of any large stock. Stocks will always fluctuate day to day, whether or not there is new news coming out about a company. For example, in looking at this 1-minute intraday chart of Apple, the price rallies, but without any concrete news or data triggering the selloffs. Instead, the long squeezes were quickly met with stock buys, meaning that the dips were caused by panicked shareholders taking profits and cutting losses that caused the declines.

Intraday Long Squeezes as Longs Forced Out By Escalating Selling. TradingView
Intraday Long Squeezes as Longs Forced Out By Escalating Selling. TradingView.

The Bottom Line

Squeezes describe types of financial and economic situations in which market pressures cause profits to decline or market momentum leads to a quick domino effect in which a lot of money is lost or made at once. As history has displayed, squeezes display just how sensitive financial markets are, from the Great Depression to GameStop in the 21st century.

Article Sources
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  1. The New York Times. "Robinhood is facing nearly 50 lawsuits over GameStop frenzy." Accessed April 18, 2021.

  2. History.com. "Bank Run." Accessed April 18, 2021.

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