A group of highly speculative stocks rallied double digits on Wednesday as retail investors pushed meme names up again in the new year following a dismal 2022.
During early 2021, a band of retail traders joined forces on social media to bid up a slew of heavily shorted stocks, creating massive short squeezes that inflicted high pain on short sellers. These meme stocks experienced big pullbacks last year when risk sentiment shifted amid aggressive rate hikes. GameStop fell 50% in 2022, while AMC tumbled 75% and Bed Bath & Beyond, plunged 82%.
While the short interest in these names has come down from its peak after the jaw-dropping episode, it still remains much higher than average. About 48% of Bed Bath & Beyond's float shares are sold short, compared with an average of 5% short interest in a typical U.S. stock, according to S3 Partners. For GameStop, the short interest stands at 21%, down from more than 100% at the height of the meme stock mania in 2021, according to FactSet. AMC has also 21% of shares sold short.
A short squeeze happens when a stock jumps sharply higher, it forces short sellers to buy back shares in order to limit their losses. The short covering tends to fuel the stock's rally further.
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