A surge in short positioning around the current S&P 500 level has created “a dangerous cocktail for right tail, or squeeze, risk,” according to a note from the trading desk at Goldman Sachs.
As of October 22, the median S&P 500 stock had short interest equal to 2.3% of market capitalization, wrote John Flood, citing data from Financial Industry Regulatory Authority (FINRA). This places short interest in the 67th percentile over the past 30 years.
The note pointed out that this figure is significantly above the 1.5% level seen at the peak of major market squeezes in 2000 and 2021.
Adding to the risk, hedge funds have already moved to cover some of their positions. Last week, they closed short bets across macro products — including indexes and ETFs — at the fastest pace in four months.
This combination of elevated short interest and recent short covering, Goldman warned, heightens the probability of a sharp upside move if bullish catalysts emerge.