Goldman says the stock market is undergoing its biggest short squeeze in 25 years - and that has hedge funds dumping stock exposure at the fastest rate since 2009

• The US stock market experienced its biggest short squeeze in 25 years over a trailing three-month period, Goldman Sachs said.
• In the past week, hedge funds withdrew from the market at the fastest rate since 2009, it said.
• Day traders have driven up shares of GameStop and other heavily shorted stocks, costing short-sellers billions.
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The US stock market experienced its biggest short squeeze in 25 years over the past three months, according to Goldman Sachs.

It all came to a head in the past week amid the GameStop madness that forced hedge funds to dump stock holdings at the fastest rate since 2009, the firm found.

GameStop shares spiked by 400% last week - and by 1,625% in all of January - squeezing hedge funds and others who had bet against the stock and costing them billions of dollars.

A short position is a bet that a share price will fall. The data provider Ortex on Friday estimated that short-sellers were sitting on losses of about $19 billion just on GameStop in 2021 so far.

The surge in GameStop and other heavily shorted stocks was driven by users of the Reddit forum Wall Street Bets. They forced prices up to make themselves money and to hammer hedge funds such as Melvin Capital; the funds had to buy shares in companies such as GameStop and the movie-theater chain AMC to close their short positions and sell other stocks to cover their losses.

Read more: Buy these 26 heavily shorted stocks as retail traders trigger wild rallies in Wall Street's least-liked names, Wells Fargo says

The activity was the culmination of three months in which a basket of the most shorted US stocks rallied 98%, far outpacing similarly aggressive squeezes in 2000 and 2009.

"Funds in their coverage sold long positions and covered shorts in every sector," said David Kostin, Goldman's chief US equity strategist.

Kostin and his colleagues said that regulations, limits put in place by trading platforms, or sharp losses could bring the amateur-trading frenzy to a halt.

"Otherwise, an abundance of US household cash should continue to fuel the trading boom," they said.

Goldman said retail investing was thriving because of savings built up during the coronavirus pandemic as well as government stimulus.

"During 2020 credit card debt declined by more than 10%, checking deposits grew by $4 trillion, and savings grew by $5 trillion," the investment bank's analysts said.

"On top of these savings, our economists expect more than $1 trillion in additional fiscal support in coming months, including another round of direct checks."

Read more: Jefferies says these 20 heavily shorted and lightly traded stocks could see big jumps in the event of a GameStop-like squeeze